Corn Starch Impact on North American Paper Packaging Industry
Starch is one of the essential raw materials in papermaking, even though it is not among the largest cost contributors. Sustained price increases in corn starch could negatively impact the margins of paper packaging producers. Today we explore supply and demand in the corn market and the price outlook for corn starch.
Corn Starch in Paper Packaging
Starch is one of the essential raw materials in paper manufacturing, from graphic paper, folding carton, to containerboard. In the case of paper packaging (containerboard and folding carton), it can increase the strength of linerboard when used as surface treatment, especially for recycled grades. Its adhesive property can also help bind linerboard and corrugated medium or enable the conversion of sheets into boxes. Between 1.5% and 5% starch by weight is used for paper packaging, depending on weight, type, processes, and geography (see Figure 1). At current prices of USD 17.62/CWT, corn starch accounts for USD 5-USD 18 per metric ton, or 2%-6% of the estimated total cash cost of containerboard.
Less starch is used in kraftliner because of its superior fiber strength compared to testliner. Starch is also used in the production of coated recycled board (CRB) from lower quality recycled fibers, often mixed paper. Corn, potato, and wheat starch are relatively interchangeable, so specific usage mainly depends on pricing and availability. Currently, in the US, corn starch is used for 95% of paper packaging, because of local availability. Likewise, potato starch is often used in Europe, while Asia mainly uses tapioca starches, and Australia uses wheat starches.
Figure 1: Estimated cash cost of containerboard making in North America, Q4 2020
Note: Corn starch cost is estimated at 1.5% by weight for kraftliner and 2.5% for recycled liner
Source: RISI, Rabobank 2021
While starch is only a small component in the production of paper packaging, the paper manufacturing sector, on the other hand, is one of the major offtakers for corn starches, after food & beverage and animal nutrition. Throughout the pandemic, raw material prices, such as that of fiber, starch, and other chemicals, have fluctuated, causing much margin pressure for paper packaging producers. North American containerboard manufacturers have subsequently announced several rounds of price increases, citing higher demand as well as rate increases in raw materials, including fiber and starch.
Corn Market: Tight Supply and High Demand
US corn starch prices are following the upward trend in the broader corn market – no demand segment of the corn market has been spared. Corn starch represents about 1.5% of total US corn demand. To understand what is happening to corn starch prices, we need to step back and look at the broader corn market. The rally in corn prices that began in August 2020 has been both supply- and demand-led, a rare and powerful combination.
On the supply side of the balance sheet, US corn supplies declined in 2020 due to drought in the western Corn Belt and the August 10, 2020 ‘derecho’ storm, which flattened crops through the middle of the Corn Belt. In addition, drought in Brazil, Argentina, and Ukraine led to reduced production there, thereby tightening up the global corn supply.
On the demand side, China’s seemingly insatiable appetite for corn has been the driving force. In 2020/21, China is expected to import 24m metric tons of corn. By comparison, the previous high watermark last year was 7.6m metric tons. China’s strong corn imports are driven by increased feed demand as they rebuild both their hog herd, following the 2018 outbreak of African swine fever, and their corn stocks. Rabobank forecasts that China’s feed consumption will grow through 2025/26, potentially pushing annual corn imports to exceed 30m metric tons per year.
Looking ahead to the 2021/22 crop year, many of these fundamental market drivers are still in place for corn prices. Continued weather concerns in all major global corn-growing regions, and the anticipated strong demand from China, all point to a supportive environment for corn prices. According to the Rabobank 10-year baseline forecast, the national average farmgate corn price is above USD 4.00/bushel through the 2021/22 crop year and will remain above USD 3.80/bushel thereafter. This compares to the farmgate prices averaging USD 3.50/bushel in the 2015/16-2019/20 crop years.
Corn Starch: Sustained Price Increases
As with all corn-based products, the net corn costs (corn price minus revenue from co-products) has increased significantly over the past 12 months. The corn price has the largest impact on the net cost of corn (see Figure 2). While corn starch prices have risen, gross margins (difference between the Midwest corn starch price and the gross net corn price) have held steady in the USD 8.00-USD 9.00/CWT range. Even though margins are stable, expected higher corn prices over the next several years compared to the past seven years will translate into higher net corn prices and therefore higher starch prices.
Figure 2: Net corn costs have risen significantly in the past 12 months
Source: USDA, Rabobank 2021
In addition, unmodified and modified corn starch as a product of the wet-milling of corn has become a more important revenue source for the corn wet-millers. The decline in demand for high fructose corn syrup – due to declining soft drink consumption – and the closure of several major corn wet-milling facilities portend a limited downward trend in corn starch pricing and, in particular, corn starch tolling fees. When using corn demand as a proxy for starch demand, corn demand peaked in the 2004/05 crop year at 282m bushels, while the five-year average corn demand for starch peaked at 234.3m bushels. This trend mirrors the other products of the corn wet-milling industry, with the exception of corn syrup and dextrose. Declining demand and constrained product supplies from the corn wet-millers, have caused product prices to rise gradually in recent years, and corn starch is no exception – a trend that is expected to continue.
Although corn starch is not among the largest cost contributors for North American paper packaging producers, the tight supply of corn in the US, combined with high demand, especially from international markets, has resulted in a 21% increase in corn starch prices in March 2021 compared to the previous five-year average. Rabobank expects the upward trend in corn starch prices to continue, which could negatively impact the margins of paper packaging producers in North America in the foreseeable future.