With a competitive advantage in both the production and transportation of corn, the US has become the world’s dominant producer.
Doug Christie, an ex-Cargill agribusiness executive and author of Agricultural Commodities Focus, explains how that came about, how the government supports production, and how the growth in biofuels continues to provide a new market for corn that goes beyond food.
The background: competitive advantages
Today, the US is clearly the dominant producer for corn globally, and we can look back at how that has come to come to be and really point to two different things.
One is a competitive advantage in the production of corn, and then secondarily, a competitive advantage in the transportation of corn to areas where it's consumed.
Looking at the production side, the US is blessed with a really broad band of area that's suitable for growing corn. The latitude of the US and the moisture coverage in the US is very well suited to growing corn. From the east of the Appalachian Mountains, going across the Great Plains, there's a broad band of the country that works to produce corn competitively. That production base - the US Corn Belt as it's called - has been the source for a US competitive advantage in producing corn.
As a result of that large production base, the US has also benefited from having access to the best technology in the form of hybrid seeds, mechanized planting equipment, access to inputs in the form of fertilizer and pesticides, and a lot of investment in producing the US corn crop that has boosted its productivity. So, a concentration of area base has attracted investment and the US has benefited from having that best technology.
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It has also benefited from having the associated infrastructure, governance and regulation that incentivizes companies to deploy those technologies here. Patent protection, copyright laws, things like that have helped spur that investment. As a result, the US has really been in a sweet spot to develop a competitive advantage in producing corn.
The US has also invested in transportation and benefited from that. Some of that large base of production is consumed in the US, but a lot of it goes globally. To do that competitively, you need to have a transportation system that moves that product. The United States benefits from having not only a well-developed railroad network which can move across the country and into export ports, but also an inland waterway system.
We talked about how the production base is broadly distributed from east to west and a bit from north to south. Within the very center of that production base, you've got the Mississippi River moving from the north of the country down to the south and the export port in New Orleans. Being able to flow grain from that production base to an inland waterway and move it efficiently out to an export port has really increased the competitive advantage from the ground up to let the US be the cheapest source of corn to the market globally.
Increasingly, the US has faced competition for that. Brazil has emerged as a large corn producer and is deploying many of the same technologies that are available in the US. Producing on large-scale industrialized farms, and increased investment in more transportation infrastructure so that that large supply base can get out to the world market has made Brazil more competitive versus the US.
So, the US has been the dominant player in corn and it continues to be a major player, but it's also now rivaled by Brazil. For world markets, this is a good thing because you've got a Northern hemisphere production base in the US and a southern hemisphere production base in Brazil. As a result, for the corn market, we're always six months away from growing a new crop, whether it be in Brazil or in the US.
I think the development of alternative markets has been good for global corn consumers as they can access both the North American and the South American production bases competitively.
Government support
When we look at US corn production, the government has tried to be supportive, but the nature of that support has evolved over time.
As the US has a competitive advantage and is the leading supplier of corn into the market globally, price support hasn't really been a feature of government policy. In other words, we haven't needed to create artificial price supports to elevate the price of corn to incentivize production. Instead, what government policy has focused on has been kind of risk management or risk mitigation for farmers.
For instance, providing insurance programs that can help support farmers in the case of a localized weather event or crop damage in a particular area. If an individual farmer or a region of the country loses crop because of a weather event, there are risk-management and insurance policies in place from the government to help sustain that farmer.
That revenue assurance, or risk management, has helped keep a large production base for corn and helped incentivize farmers to keep corn as a part of their production portfolio.
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The other place where government policy has been active in the corn market is in the form of incentives to produce and incorporate ethanol into the US fuel supply system. That has provided an outlet for corn and helped support prices and create an incentive to produce corn. So, it would be fair to say that the US’ ethanol production policy has helped drive corn production and help make the US a large producer of corn globally.
Biofuels as a new market
Something we've seen in ag markets increasingly in the last several years has been the convergence, or the intersection, between food markets and fuel markets. And that intersection has been driven by two different kinds of dynamics.
At times, we've seen a price-driven intersection between those markets. As we have the technology to take corn and turn it into ethanol, or take soybean oil and turn it into biodiesel to replace petroleum diesel, there are times when the relative prices of ag products versus energy products make that profitable.
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For instance, when vegetable oil prices get very cheap and petroleum prices are very high, you can convert vegetable oil into fuel and push it into the fuel supply chain. Or you can convert the starch and corn into alcohol and ethanol and push that into the fuel supply chain. There’s now this large pool in the energy markets that the ag market can intersect with.
Also, that intersection has been driven by public policy. For a variety of reasons, governments have incentivized or supported the conversion of ag products into fuel. They’re doing that with either mandates about the incorporation of a renewable supply into fuel, or with price supports and subsidies for producing or blending ag-based fuels with energy fuels.
That policy has prompted additional investment in producing biofuels. It has become a very important demand segment for markets, and it's something that today I think is quite entrenched in markets. So, while initially it was kind of a novel idea to convert food into fuel, today in the US, in Brazil, in Malaysia, in big ag production bases, the intersection of food markets and fuel markets is really pretty well established.
I think it's going to be quite some time, if ever, before the markets separate again. The relative amount of intersection will vary with prices and policy, but the conversion of energy markets and fuel markets or food markets is with us to stay and certainly is set to be a feature of ag markets going forward.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
