Chinese Sorghum Demand Spurs U.S. Growth, Investment
China is behind the rising demand for U.S. grain sorghum that has placed a premium on the crop, benefitting farmers and seed developers alike.
The push for sorghum has created an industry shift that has caused farmers to reconsider their crop rotations and economists to upwardly revise their guidance. The US Department of Agriculture Economic Research Service (ERS) in January raised its 2014/2015 U.S. sorghum export forecast by 17 percent to 270 million bushels, a level not visited since the 2007/2008 marketing year.
While industry participants ride the current tide, institutional investors are similarly showing up, evidenced by sorghum planting seed developer Chromatin’s recent US$12 million equity raise.
Kansas farmer Clayton Short’s 2,200 acre farm is comprised of wheat, soybeans and grain sorghum. The stage is set for the 2015 new crop. “We reduced wheat acres by about 15%, and we reduced soybeans by about 15%. That’s all going to grain sorghum,” Short told Global AgInvesting, adding the entire sorghum harvest will ultimately be sent to China. “We can change the crop rotation to what we feel can make us the most profit per acre.”
The USDA ERS sorghum price projection for the 2014/2015 season, which ends in August, is $3.80 per bushel, up $0.30 from previous estimates. This compares to estimates of $3.65 per bushel for corn.
According to Short, Central Kansas is currently getting $0.90 a bushel more for sorghum over corn, which is largely unprecedented. “Generally [sorghum is] even or below corn’s price. It’s a good deal for sorghum growers,” he said.
Kansas farmer Short is making that gamble. His shift to higher sorghum acreage is for the new crop bid that has yet to be harvested. China has only booked sorghum bushels as far out as May. Nonetheless he is confident the demand is sustainable. “We want to believe -- and there is some evidence -- they will continue this buying throughout the summer,” he said.
Short’s farm currently yields about 80 bushels of sorghum per acre, a harvest he says could be better once seed technology catches up with that of other crops.
“Sorghum research has lagged well behind corn, soybeans and wheat. That’s a real issue for sorghum growers,” he said.
According to Daphne Preuss, President and CEO of Chromatin, that’s all about to change. “We now have leading products that are undergoing scale-up,” Preuss told Global AgInvesting, pointing to results from Chromatin hybrids in China where yields have increased by as much as 30 percent.
Chromatin, which sells sorghum planting seed that creates crops for a variety of end-use markets, came on the scene in 2009 when it began investing in sorghum R&D. The company is entirely focused on sorghum. “We looked at 40 crop options, and this one rose to the top,” said Preuss.
The formula has been a success for Chromatin, evidenced by the tenfold revenue growth the seed company has experienced since 2010. Today the business has revenue in the tens of millions of dollars and is transitioning to profitability. Chromatin has raised US$72 million in equity since its formation including the $12 million follow-on investment from Wood Creek Capital Management in December, which will go toward company expansion.
While Preuss thinks about Chromatin’s exit strategy, including a possible IPO or acquisition, the company remains focused on growth. “We don’t have a for sale sign on the front lawn,” she quipped.
China’s No. 1 end use for sorghum is the livestock industry for everything from swine to their duck population. However, there is also a pocket of demand for other end uses. “Their drink of choice is baijiu, a grain alcohol made from grain sorghum. We’ve seen significant interest in Kansas for sorghum through [shipping] containers,” said Sarah Bowser, Sorghum Checkoff Regional Director for Holton, KS.
Chromatin currently sells its hybrid seeds in 40 countries including China, where its growers buy forage sorghum as feed for the emerging dairy industry.
China has been favoring sorghum over corn amid constraints on the latter crop, including a GMO corn trait rejected by the country. Sorghum, meanwhile, has no GMO link. While the GMO corn trait is now allowed, U.S. producers are in no rush to ship the controversial crop for fear it will be returned anyway.
“There is still robust [sorghum] demand from China including for new crops,” said Bowser.
Sorghum Checkoff, which was formed to support investments into R&D for the U.S. sorghum market, has in recent years been sending industry experts and trade teams including farmers to educate the Chinese about sorghum usage. China’s need is so great that the entire U.S. sorghum crop couldn’t meet the Asian nation’s duck-feed grain demand.
“This speaks to the significance of Chinese feedstock demand and is a major reason we’re seeing market attention and significant base levels and premiums at the farm gate in the U.S.,” said Bowser, adding Chinese demand continues to be present going forward. “There is a high degree of confidence that this demand will continue into the near-term future, for sure into next fall. The substantial demand should trigger increased acres and change planting decisions.”
According to Preuss, there are several favorable macroeconomic drivers for sorghum, something the company recognized before the stars aligned for Chinese demand. “Globally there is an increased population and greater demand for protein-rich food,” she said.
Meanwhile, there has been a deterioration in farmland quality, which lends itself to a crop like sorghum that requires half the water that corn does to grow and needs fewer inputs.
Besides, according to Kansas farmer Martin Kerschen, who has had a crop rotation with sorghum (33 percent), soybean (33 percent) and wheat (33 percent) for the past five years, “Sorghum is a great crop and fun to grow.” Kerschen has had success with his current crop rotation and isn’t changing a thing. He hopes, however, that neighboring farmers will similarly recognize the benefits and profits tied to sorghum and U.S. acres will ramp up.