Corn Prices: Where's The Top?

January-13-07

The next question for the corn market is how high will corn prices go? Of course no one knows for sure, but we can at least explore the question and consider what events might cause the top to be reached.

USDA reduced the size of the 2006 corn crop by 210 million bushels with a 400,000 acre reduction in harvested acres and a large 2.1 bushel per acre reduction in national yield. The national yield was set at 149.1 bushels which was very close to the USDA’s first estimate of 149 bushels starting back in May 2006. Thus, yields in 2006 could be considered close to average, clearly not a short-crop. Feed usage was dropped by 75 million bushels, but export usage rose by 50 million with ending stocks dropping 183 million bushels to a mere 752 million bushels.

The ending stocks-to-use ratio for the U.S. is now estimated at 6.4%, the tightest year ever except for the record high price corn marketing year of 19954/96 when the ratio reached 5.0%. Corn is desperately tight in the world market as well at 10.7% with only the year of 1974/75 tighter at 10.3%.

Even though corn prices pushed into the higher $3.00s last fall, there is little evidence that users have begun to cut back yet. Ethanol use will grow this winter as more plants come on-line. Corn export commitments (a combination of loadings and purchases) so far this marketing year are up 44% compared to USDA’s estimated 5% increase. So far, the livestock industry has not shown much response as cattle on-feed numbers are still up 2% (although placements were down 13% and 8% in October and November); pork production is expected to rise by 1.8% in 2007 and poultry production by 1.2%. What this means is that corn prices probably have not been high enough yet to get some further cut back in usage.

How much higher do corn prices have to go to get some added reduction in usage? By the end of 2007, we will probably be able to say---not too much higher, but in the next few months, corn prices may well go much above the price level needed to cut usage by the amount necessary. Consider the last year when usage had to be cut, 2002/03. That year usage was cut by 3.4% and prices averaged $2.32 per bushel, yet the high on corn futures was $3.35. The more analogous case would be the all time high price year of 1995/96 when the average price received by U.S. farmers was $3.24 for the year, yet the high futures price was near $5.55.

Corn futures are now poised to sail through the $4.00 mark which has provided a ceiling to prices in all previous price spikes except for 1995/96. Given the amount of interest in corn futures from hedge funds and from speculative buyers, a rapid increase may be expected in coming weeks. The market now may be moving in roughly 40 to 50 cent up and down moves. If so, this could put the $4.50 level as a first objective.

What are the upcoming pieces of information that will feed this market? Weekly export purchases will be closely watched. My guess is that with the relatively weak U.S. dollar, foreign purchases will actually increase in coming weeks in a “near-panic” buying spree. The same may be the case initially for domestic corn users. Generally prices peak when there are clear signs that prices have been high enough to show actual cuts in usage. This may be the March 30th stocks report which may begin to show the decline in winter livestock feeding rates. Also on the 30th is the critical Prospective Plantings report. If that does not show an 8 to 10 million acre increase in corn for 2007 seeding, a further price surge could be needed. My view is that the report will reflect a 10 million or somewhat greater acreage increase.

Weather prospects for the 2007 crop will of course be a major driver of corn prices into the late winter and spring. If prices have not tested the $5.55 futures highs by that point, then weather may be the last major event that could cause such a test. Of course this includes both spring as well as summer weather.

One of the peak price periods then could be late winter into early-spring. Thus, pricing from mid-January until early April appears to have strong merit. If weather is at least normal or better than normal this growing year, prices will be lower in mid and late summer than they are in late winter and early spring. And if there are yield threats, the $5.55 mark has much higher odds of being tested or exceeded this year. Since 1975, in 22% of the years, corn yields have dropped by 5% or more from their trend. Thus, on average the odds have been about 20% to 25% that weather would be severe enough to push corn prices to retest highs or make new all time highs. Keep in mind that those odds are far from 100%.

For new crop pricing, December 07 futures will have to move higher relative to soybeans to get even more acres. Using a conventional strategy of pricing 25% to 35% of the 2007 crop in the mid-February to mid-May period now seems reasonable.

There will be a point at which you will want to be a seller because corn will be priced above breakevens for many end users. Hog produers have a corn breakeven price of about $3.25 this winter, but more like $4.00 per bushel into the spring and summer when hog prices are expected to be higher.

Also, remember that the economics of ethanol is much different in 2007 than it was in mid-2006. Our estimates are that breakevens could be around $4.25 per bushel now, but could drop to more like $3.50 to $3.75 per bushel by spring and summer, if ethanol prices drop as those futures now anticipate. Assuming corn prices are above $3.50, this means some ethanol plants could temporarily shut down awaiting new-crop corn supplies, and that many of the plants interested in building may put those plans on hold.

Chris Hurt
January-13-07
Purdue University