Corn Prices: How High is Defendable?

November-21-07

Now that the corn crop has been tucked into storage, many producers are asking just how high can corn prices go? The correct answer is “it depends.” As always sorting through the possible driving forces and coming up with a price ceiling is a nearly futile activity. However, the value of thee exercise comes in at least having thought about the possibilities.

Keep in mind that there is no shortage of U.S. corn for the 2007/08 marketing year. Carryover inventory at the end of August 2008 is expected to be 1.9 billion bushels according to USDA. The current strength in corn prices is primarily supported by the anticipation of much smaller corn acreage for the 2008 crop. Thus in the 2008/09 marketing year corn inventories will tighten to perhaps 1.0 billion bushels. This means that one of the driving forces of corn prices will be soybean and wheat prices as those crops compete for limited U.S. acres in 2008.

Soybean futures prices are near the $11.00 level. If they move above $11, the talk of a possible re-testing of the all time high near $13 becomes a reasonable discussion. Such price strength in beans would draw even more interest in 2008 bean acres and the subsequent lower corn acres means corn prices will go along for the soybean bull ride. Following this line of reasoning, if old crop beans move up an additional $2 per bushel, then new crop (2008) might move up about $1.00 per bushel. This would stimulate 2008 crop corn prices to move up about $50 per bushel. Since old crop corn prices are linked to higher prices by the reduced acres for the 2008 crop, this means old crop corn could move up the same $.50 per bushel. That might put March futures near $4.50 per bushel.

Another line of reasoning is that end users will continue to bid up corn prices as long as they can cover the costs. Livestock feeders are a variable lot. Hog producers are facing huge losses right now and will have resistance to higher corn, but the unfortunately huge inventory of hogs is already in feed pens today and thus cuts in corn usage probably won’t come until the second quarter of 2008. More cattle are headed to feedlots as placements have been up over the past three months, particularly heavy cattle that will eat a lot of feed in the first quarter of 2008. Broiler numbers are now expected to move up more rapidly than had been expected as well, so corn usage for feeding will remain high.

Our export buyers are expected to be aggressive buyers in coming months as well given strong world income growth and the record low value of the U.S. dollar that may not have reached the bottom. Then there is the possibility that China will become a net importer of corn this marketing year.

This leaves us with the ethanol industry and how their usage may vary if corn prices move upward. Given the depressed ethanol prices in September and October my line of reasoning had been that cash corn price in the $3.60 to $3.80 area would cause a slowdown in processing thus providing a naturally self-limiting ceiling to cash corn prices. We have to re-think and re-calculate those margins today because ethanol prices are up 30 cents per gallon since September and distiller’s grains have increased $45 per ton. Plus we have experienced the unrelenting rise in crude oil prices which give greater incentives to blend more ethanol.

Assuming ethanol can continue to move higher toward $2.00 a gallon (from the current $1.75 to $1.80 range at Iowa plants) and dried distiller’s moves on upward to $155 from the current $140 per ton, this means that cash corn prices of $4.25 per bushel (consistent with $4.50 March futures) are also possible. Of course, a corn price ceiling much lower than this are in the possibility set as well!

Thus $4.50 March futures remain a possibility. The bet on timing might be sometime in mid-to-late winter. An orderly flow of pricing for 2007 corn yet to be priced would be to start pricing in late November, then plan to add to those percentages in the mid-February to mid-May, and hold smaller volumes to be priced into June/July for the possibility of U.S. weather concerns. Pricing of 2008 crop might start in that late-winter to early-spring period as well.

Chris Hurt
November-21-07
Purdue University