Grain Bottlenecks Beckon

Transportation and storage will be tight again this year. Three record corn and soybean crops will likely test the nation's grain storage capacity and overburden transportation systems for yet another year. This is a repeat of large 2004 and 2005 crops, according to grain industry analysts. In fact, USDA predicts U.S. farmers will reap their second largest corn and soybean crops ever during 2006.

Returns on additional storage facilities should be higher than normal, says Bob Wisner, Iowa State University ag economist. “We're quite likely to see transportation shortages and storage space shortages in some areas this fall.”

USDA projections point to three record corn and soybean crops having occurred during the last three years, creating a continuous glut of grain. On the other hand, a dramatic jump in demand for ethanol and a recent upsurge in grain exports will help to erase much of the old-crop carryover stocks during the next 11 months, says Wisner. As stocks go down, corn prices will likely rise, he adds.

“The most significant long-term development for corn is that this year's production is projected at 800 million bushels below demand,” says Wisner. “Carryover stocks are enough to take care of that shortfall for now. Next year the market will almost certainly need a substantial increase in corn acreage to meet demand. As a result, cash prices will likely trend upward gradually after harvest.”

U.S. grain export sales have also begun more strongly this year than last, adds Wisner. “Soybean export sales (in early September) are 58% above one year ago and 8Ω% above two years ago at this time,” he says. “Corn exports are 50% above one year ago and 51% above two years ago.”

Grain storage and shipping demands may decrease, however, in parts of the western Corn Belt, which endured unusually hot, dry weather this spring and summer that significantly sliced wheat yields, says Kevin McNew, president, Cash Grain Bids, Inc., Bozeman, MT. “I wouldn't expect a lot of grain storage problems in the western Corn Belt where the wheat crop was dismal,” he says.

Yet, in the eastern Corn Belt, where USDA expects average yields to jump highest over last year, significant premiums are being offered to store corn, adds McNew. “The carry in the market (as of mid-September) in Indiana is 30¢/bu. to store it until February,” he says. “So a farmer in that area could make 30¢ on each bushel to store corn for five months. But in Nebraska, the carry for the same period is only 13¢/bu.”

U.S. grain storage remains tight, despite some excess storage space in the Great Plains, says Ken Eriksen, vice president of transport services, Informa Economics, Memphis, TN. “During the first week of September, there was about 94% utilization of grain storage capacity,” he says. “At this time last year, there was 97% utilization.”

Eriksen agrees that a fairly large carry in the market will motivate producers and grain elevators to store corn. “Like last year, there will likely be a lot of grain stored on the ground for several months,” he adds. “There are fairly good economic incentives to do that.”

Low water flow, however, has slowed grain barge movement this summer and may result in more grain left in storage longer this fall. “Low water levels have been a perpetual problem for barges since June, especially south of St. Louis,” says Eriksen. “And it's unlikely that a return to normal water levels will occur soon. To operate at low water levels, barges typically must reduce the number of barges being towed together and the quantity of grain per barge. This significantly increases the cost to move grain by barge.”

More barge delays will likely continue on the Mississippi River as an aging lock-and-dam system undergoes needed upgrades, says Bob Zelenka, executive director of the Minnesota Grain and Feed Association.

Higher barge rates typically correlate with less competitive rail rates, says Steve Strege, executive vice president of North Dakota Grain Dealers Association. The U.S. needs more shipping capacity, he adds. “Captive shippers are paying for the service, but not getting it when they need it.”

However, as of mid-September, more corn was headed by rail to coastal markets than at this time last year, says Eriksen. “Railroads have been moving quite a bit of grain on both western and eastern carriers,” he says. “The rail fleet is static to slightly larger in size, and train speeds have been steady with good operating conditions. So far, rail service this year appears to be better than last year.”

But a record number of intermodal movements will likely strain the rail system this fall, says Strege. “During the last 8-10 years, a lot more consumer goods have been coming from China into West Coast ports and then via rail to major population centers in the U.S.,” he says. “The peak in that demand occurs in the months before Christmas, during fall harvest.”

These intermodal shipments compete with grain, points out Strege. “Christmas won't wait for consumer goods,” he says, “so grain shipments may become secondary.”

Ethanol Could Cut Grain Transport Needs

More corn consumption from ethanol production could result in less corn being shipped to distant markets, say grain industry experts.

“If we use our own corn to brew ethanol, we won't have much grain to ship anywhere else,” says Steve Strege, executive vice president, North Dakota Grain Dealers Association.

In future years, increased ethanol production might significantly reduce the need for long-distance grain transportation in some areas, agrees Bob Wisner, Iowa State University ag economist. In the short term, however, that shouldn't be the case.

“USDA is projecting a 34% increase in corn processing for ethanol (in 2006),” says Wisner. “I don't see that reducing the demand for grain transportation needs this fall because of the increased demand for exports this year.”

Ethanol is not a substitute for existing demands for corn, Wisner says. Although a lot more corn will be processed locally into ethanol in 2006 than before, the demand for corn for livestock feed and other uses will continue, as will the need to transport grain from farms to distant markets.

During this crop year, there will be no major shift in corn movement away from long-distance markets, Ken Eriksen, vice president of transportation, Informa Economics, agrees. “However, people still have lots of questions and concerns about how the growing ethanol market will impact grain handling and storage, grain exports, grain origination and acreage shifts in the future,” he says.