No Surplus of Corn After All: Prices Will Improve Even More

October-10-09

The size of the corn crop still remains unknown even though the USDA has said it will be near record. The reason is the lingering question of how much production will ultimately be lost to frost damage on a crop that was just too late to beat what turned out to be about a normal first frost date.

In their October update which had no adjustments for frost damage, USDA said endings stocks for the 2009/10 marketing year would be 1.67 billion bushels, nearly identical to those of the 2008/09 crops. The average farm price for the marketing year was left at $3.35 per bushel, a sharp decline from the $4.06 average for the 2008 crop.

While the October 9th USDA update was welcomed, it was overshadowed by the need to evaluate the implications of frost damage during the October 8 to October 12 time period. The impact is difficult to quantify and individual estimates will have wide ranges.

The amount of damage will depend on the extent of the frosting/freezing and on the stage of development of the plant. See the following for an evaluation of potential yield losses by stage of production http://www.ces.purdue.edu/extmedia/NCH/NCH-57.html The impacts are both on yields and on reduction in corn quality and handling issues are important as well..…see http://www.ces.purdue.edu/extmedia/GQ/GQ-27.html

Fortunately, the majority of corn had reached dent stage by October 4. The major corn states of Iowa, Nebraska, Minnesota, and South Dakota were reporting that 95% to 100% had reached dent. A bit further east, the crop was not as far along with readings of 89% to 90% that had at least reached dent in Wisconsin, Illinois, Indiana, and Michigan.

I have made very rough estimates of these potential yield losses based on the immaturity acres and percent of yield loss in the potentially affected states. That estimate puts production reductions at near 30 million bushel per state for Illinois and Minnesota, with Iowa dropping 15 million bushels. The total of all states was 130 million bushels of reduced production. These again should be viewed as very rough.

While there will be wide debate on the actual losses in coming weeks, this provides a framework for discussion of the potential impacts on corn prices. Assuming the loss of 130 million bushels, this could reduce ending stocks to a range from 1.55 to 1.60 million bushels and could have a 15 to 30 cent per bushel impact on higher corn prices. This would raise the current estimate from $3.35 per bushel to $3.50 to $3.65 per bushel.

Much of course will also depend on corn usage in the coming year. USDA’s estimates of feed and residual use at 5.4 billion appear too high given the expectation for total production of livestock and poultry to be somewhat lower in 2010 and with additional distiller’s grains production that will substitute for some corn feeding. This could easily be overestimated by 100 million bushels or more.

Perhaps the clearest statement is that there will be no surplus inventory of corn in the U.S. or the world this marketing year. This means corn prices have already made their lows back in early September, and raises the odds for a substantial increase. Some of those factors that could provide larger price increases are greater than expected losses from frost, a more rapid world economic recovery and a weaker dollar that will stimulate greater exports. If economic recovery is more rapid this will also stimulate energy prices which will provide corn price strength through greater ethanol production.

What does this all mean for prices this fall and for storage returns? The harvest will be strung out due to slow maturity, long handling times due to high moisture and dryer delays. This means basis will continue to be stronger than normal at harvest and that the normal harvest price depression will not be as severe. In general, there will also be sufficient storage for the crop.

Storage returns continue to appear favorable with prices moving upward by 35 to 45 cents per bushel by spring and summer. If harvest time cash bids are in the $3.25 to $3.50 range this would mean they could move to at least $3.60 to near $4.00 a bushel at times. Cash prices above $4.00 will probably require one or more of the events listed above.

USDA also increased their estimate of Indiana corn yields from 163 bushel per acre to 166. Normal yields would have been near 160, so yields, on average are about 3% to 4% above trend. That is good news for many producers as yield prospects have improved and now price prospects have improved nearly 50 cents in the last three weeks.

Purdue estimates of total costs of production for the 2009 crop exceeded $4.00 a bushel, so the recent yield and price increases are helping many producers generate revenues that are closer to their high costs of production. Of course those with frost damaged corn may not benefit as much in these financial improvements.

Chris Hurt
October-10-09
Purdue University