Corn Pricing Window Begins Now

February-16-08

The USDA made no changes to the supply and demand balance sheet in the February update. There will be strong support for corn prices due to continued tight inventories which will carry into the 2008 crop, and due to fundamental support for both wheat and soybeans. Export demand remains a positive force as well as the continued need to have new crop corn prices compete for 2008 acres with both soybeans and spring wheat.

What’s happening to export purchases? In the past four weeks, the pace of export sales has quickened with sales registering a 33 percent increase over the same four week period one year ago. Thus, high corn prices are not yet causing foreigner buyers to cut back on use.

Are there signs that the livestock sector is moving toward liquidation of animals and therefore reducing corn usage? There are many signs of distress ranging from hog producers, to the poultry industry to cattle feeders, but there are few signs of liquidation, at least not so far. Hog slaughter numbers this year have been an astounding 10 percent higher. That takes a lot more corn. There is much talk of sow liquidation, but little evidence that the rate of sow slaughter (relative to the size of the breeding herd) is higher. Placements of cattle going into feedlots have slowed however, and over time, there will be other reductions in feed usage.

Purdue budgets continue to suggest that new-crop corn prices are too low relative to soybeans. This means that soybeans will continue to garner increased acres-my current estimate is nine percent higher. Corn acreage will drop- my current estimate is down five percent. Estimated soybean returns per acre have been running about $20 to $30 better for soybeans vs. corn (on average quality Midwestern land). So, new crop corn needs to increase $.20 to $.30 per bushel, just to have a chance of getting needed acres. The March 31st Prospective Plantings report will be the single USDA indicator of what farmers are thinking with regard to acreage decisions. My guess for now is that corn acreage will be far too low.

Fundamentals remain very supportive to prices. In fact, the 2008/09 marketing year is a greater concern for limited corn stocks than is the 2007 crop. A wide sweep of prices may be expected over the coming month. May futures as an example have ranged from $4.80 to $5.40 in the past three weeks. Prices may stay in that range as market participants await more information on southern hemisphere supplies, on export buying, and on early weather prospects for the upcoming U.S. growing season.

Pricing decisions will be difficult. The period from mid-February through May has historically been an overall favorable period to be pricing. Having an orderly plan of moving old crop sales up to 75 to 80 percent priced by planting time this year could be considered.

Starting your new crop sales program is also generally advised in the mid-Feb through May time period. Having 30 to 40 percent of anticipated new crop production priced by planting time is a reasonable guideline.

Spring and summer weather prospects for the U.S. are mixed (as is often the case). For an area from the Carolina’s westward to the Southern Plains, the National Weather Service is pointing to warm and dryer than normal conditions for the spring and summer. This may raise added concern especially for wheat supplies in the Southern Plains. For the Midwest, their call is for a generally warm spring which could get planting off to a good start, and then “no call” for the summer, which means they cannot see indicators that tilt them toward any particular condition.

Elwynn Taylor at Iowa State University has suggested a higher than normal odds of harmful weather this summer. In his last update in December he lowered his expected national yield from normal. He looks at several factors in his models. First, Midwest sub-soil moisture is well recharged in the prime Corn Belt. However, on the negative front he mentions: (1.) the continued drought in the Southeastern U.S.; (2.)the on-going La Nina and; and (3.) the cycle that has given major droughts on about a 19 year schedule (last one in 1988). You can view his updates at http://www.extension.iastate.edu/notes/display.aspx?catID=102

Crop insurance evaluations need to be done now (deadline March 17th). Crop insurance will seem expensive, but the margin risk is enormous and insurance can be used to reduce downside risk while still leaving positive outcomes (high yields and prices) in place.


Use of This Information: This information is based upon current evaluations by USDA and Purdue analysts. While it utilizes the latest known information, future outcomes can be much different due to shortcomings in analytic methods, to inaccurate anticipation of future events, and to unforeseeable new events. Ultimate outcomes are often different than provided in the outlook. Thus, this information should be used in conjunction with other outlook sources and decision makers should always evaluate how a range of potential outcomes would impact their firm or organization. Purdue University is an affirmative action/equal opportunity institution

Chris Hurt
February-16-08
Purdue University