The devastating U.S. drought and ensuing crop disease are upending traditional grain movement patterns, with dozens of trains and barges shipping North Dakota or Mississippi corn into the Corn Belt rather than out to the coasts.
Processors and ethanol producers in No. 2 corn state Illinois, where the average corn yield was the lowest in nearly 25 years, are "importing" millions of bushels of the grain - an unprecedented volume - from North Dakota, which produced a record crop this year, trade sources said. Northern corn is even reaching key livestock states such as Texas and Oklahoma.
Some southern states, which were also spared the worst of the most extensive drought in half a century this year, are shipping barges of corn up the Mississippi River to the interior, reversing the normal trade flow, traders say.
While atypical shipments are not unheard of in the agricultural market, traders say the scale of this year's upheaval is unprecedented. It is being fueled both by the dramatic difference between drought-hit Midwest crops and bumper harvests in fringe states, as well as the prevalence of a naturally occurring toxin, aflatoxin, that can harm livestock.
The unusual grain flow could foreshadow a scramble for quality corn supplies in the months to come as end-users work through the smallest U.S. harvest in six years. By next September, corn stocks are projected to drop to just 5.5 percent of annual demand, the bare minimum of operational requirements.
The market dislocations could benefit logistics firms and big merchants such as Cargill, which reported a four-fold rise in earnings this month and said "atypical trade flows" would spur more demand for its trading expertise.
Railway companies, which are already reaping windfall profits from upheaval in the oil market, are also moving quickly to take advantage of the scramble in grain trading.
BNSF Railway last month posted rates on its website for shuttle services from Minnesota and the Dakotas to Illinois, which traders said was a first for the route. BNSF said it changes rates based on consumer demand and market conditions but declined to comment further.
Canadian Pacific Railroad has responded to "increased demand for corn from the Northern Plains to be moved to eastern parts of the country", a spokesman said, declining further comment.
QUALITY ON THE FRINGES OF THE CORN BELT
Signs of a supply squeeze were already evident in global trading patterns, with U.S. livestock producers booking corn from Brazil in the wake of soaring feed costs.
But they have become more evident in the cash market for U.S. grains since the Midwest harvest began in September, illuminating the uneven impact of the drought.
The average 2012 corn yield in Illinois is projected at 98 bushels per acre, a 24-year low. By contrast, producers at the edges of the Corn Belt grew record or near-record crops with excellent quality. Production in North Dakota surged 80 percent; Mississippi's yield jumped to a record high.
"Test weights are fantastic. We have never seen corn like this in our lives," said David Fiebiger, manager of the Finley Farmers Elevator in North Dakota, a shuttle-loading facility that has dispatched one train of corn to the Midwest.
In Hillsboro, North Dakota, Cory Tryan, manager of the Alton Grain Terminal, said only one of the 10 shuttle trains loaded with corn from his facility this autumn - carrying a total of about 4 million bushels, or 1 percent of the state's corn crop - was shipped to the Pacific Northwest export market. Normally all his corn is shipped to Asia.
Tryan said the remaining nine were being rerouted to Decatur, Illinois, and St. Louis, Missouri, among other Midwest destinations.
"We were fortunate to have corn quality and good yields that are helping fill the void to our south," Tryan said.
Decatur is home to agricultural powerhouse Archer Daniels Midland Co, while London-based Tate & Lyle, a sweetener maker, also has a plant there. Neither company would comment for this story.
One source in the cash grain market estimated that as many as two to three shuttle trains of corn, which carry about 400,000 bushels each, are arriving daily in Decatur, shipped from the Dakotas or Minnesota, a record volume.
On top of production shortfalls, grain handlers in several top corn states are struggling with outbreaks of aflatoxin, a byproduct of the drought. Aflatoxin can cause liver disease and is considered carcinogenic. Federal guidelines limit aflatoxin concentrations to fewer than 20 parts per billion in human food, while the threshold for milk is even lower, at 0.5 ppb.
Aflatoxin, which attacks drought-stressed corn, hit hard in the southern half of the Corn Belt, including central and southern Illinois.
As a result, ethanol distillers as well as other processors in the region have been on edge. Mike Hall, president of MLH Futures in Litchfield, Illinois, said corn arriving into St. Louis was likely earmarked for ethanol plants.
Aflatoxin is a problem for ethanol distillers because any contamination in corn becomes more highly concentrated in dried distillers' grains, an ethanol byproduct that is sold as animal feed and serves as a key part of ethanol plants' profit margins.
Because corn from the Dakotas and Minnesota is virtually free of aflatoxin, brokers said, end-users of the grain have been paying up for it, effectively creating a two-tiered market. Clean corn from the northern states delivered into central Illinois costs roughly 20 to 30 cents per bushel more than corn bought locally.
"They are paying a premium to get corn without aflatoxin. That's why they want that corn," Hall said.
SOUTHERN CORN BARGING NORTHWARD
The movement of northern corn marked the second wave of corn brought into the core Midwest from the fringes of the grain belt. Roughly 80 to 100 barges carrying 4 million to 5 million bushels of corn were shipped up the Mississippi River and into the Illinois River in late August and early September, said Roy Huckabay of the Linn Group, a Chicago brokerage.
The bumper corn harvest in Mississippi and Louisiana created big discounts at that time in the local cash market, allowing Midwestern buyers to pay to ship the grain upriver. Southern corn occasionally moves northward but rarely in as large a volume, a barge source said.
The corn was unloaded in Havana, Illinois, and moved to Tate & Lyle elevators, Huckabay said, although he added that the buyer was not necessarily Tate & Lyle.
"There was a huge discount because they had so much corn down there, they had such great yields and nowhere to go with it," the barge source said, noting poor export demand. "So it definitely worked this year, versus normal years."
Diana Klemme, vice president of Grain Service Corp in Atlanta, which advises grain buyers and sellers on marketing and risk strategies, said atypical patterns of grain movement are likely to continue as corn buyers work to cover their needs until the next harvest.
"My word to customers," she said, "is to keep your eyes and ears open and talk to people you have not talked to in years, because you don't know where the next deal is going to come from." (Additional reporting by Karl Plume and K.T. Arasu in Chicago; Editing by Dale Hudson)