Corn Acres Too Low Means Prices May Spike?

March-14-08

New-crop corn futures spent the entire winter in dormancy. What does that mean? New-crop corn futures did not provide sufficient price incentives to get producers to plant enough corn. Rather, the “hot” markets all winter were wheat, especially spring wheat, and soybeans. As a result, we can expect the March 31, Prospective Plantings report from USDA to indicate that producers intended to sharply increase soybean and spring wheat acres at the expense of corn acres.

My estimate for planted corn acreage is about 88 million acres. This will be a reduction of 5.6 million acres from last year. With trend yields at 153.5 bushels per acre, this would provide a crop at about 12.4 billion bushels, a reduction of 600 million bushels from last year.

There is a problem. A lot less corn production facing a lot more corn usage from new ethanol plants opening this spring and summer. The potential utilization of corn for ethanol could rise as much as an additional 1.4 billion bushels for the 2008/09 marketing year. To illustrate just how short corn supplies could become, add the 1.4 billion bushels of new ethanol demand to this year’s utilization near 13 billion. That’s 14.4 billion of potential use with a crop size of only 12.4 billion. This means some end users will have to cut use dramatically.

Which end users will have to cut their usage? Think about the four main users as: ethanol, food and industrial, exports, and domestic livestock. The amount of corn ultimately used by the ethanol industry will be determined by ethanol margins. There may be many components to ethanol margins in 2008 that is beyond our scope here. However, crude oil prices will likely be one of the keys. High crude prices probably mean high ethanol prices. If ethanol margins should stay positive the ethanol industry may be able to bid strongly for limited corn supplies. Currently futures markets are suggesting ethanol plants can bid in a range of $5.25 to $5.50 per bushel for the 2008/09 crop. At this point, they appear a strong contender to get a large share of their needs from the 2008 crop.

The food and industrial sector can largely pass the corn price increases to their buyers. Examples would include the cereal manufactures and the high fructose corn syrup industry. Thus their usage is expected to be close to steady in 2008/09.

The export sector is currently increasing use even with higher corn prices. Why? Obviously, their motivation is driven by strong world income growth, short world food stocks, and the unrelenting drop in the exchange rate of the U.S. dollar. Thus, these are likely the factors that will drive export purchases for the 2008/09 crop. Again many uncertainties exist, but world production should rise this year, world economic growth should slow, and the exchange rate of the dollar, while not showing signs of bottoming yet, may do so by this summer or fall. Thus, from an outlook standpoint, some reduction in usage can be expected in the export sector in 2008/09.

The weakest sector will remain the domestic livestock sector. Financial stress will be abundant and the greatest downward adjustment of use will be forced upon the sector. I currently am anticipating that feed and residual usage will drop ten percent. As mentioned above, the degree that livestock feeders have to adjust will heavily depend on ethanol margins, world crop size, and the direction of the dollar.

The corn market still has sound fundamentals for cash prices to move into the $5.50 to $5.70 range this spring. The March 31 Prospective Plantings report is expected to be bullish especially for new-crop corn, but old-crop should move in the same direction. This provides the prospects for the peak spring corn price to be in early-April.
However, futures markets could be in near-turmoil at times, at least extreme volatility and wide ranges in prices should be anticipated. Not only may the March 31 report be dynamic, but also shifting futures positions of hedge funds and other speculative interest could cause extremes.

New-crop pricing opportunities are expected to be robust in late-March and early-April as well. If the March report is as bullish for new crop corn as I expect, December corn futures could move well above $6.00, perhaps into the $6.25 to $6.50 range.

Since many of the elevators may not be offering forward contracts on grain at that time, new-crop pricing is much more complicated for many. If your elevator is not offering new crop cash contracts, then the only alternative for those that want to add to new-crop pricing is to use futures or options directly with a broker or market advisor that offers brokerage services.

Two final points: If you are not familiar with holding futures or options positions yourself, now, just before planting, may provide a little time to learn about these alternatives. Secondly, if you are going to hold futures positions or short positions in options, you must margin those positions. You MUST understand the enormous potential cash flow risk in those positions, and you need to make sure your lender will supply a line of credit to meet those potential margin calls.

Finally, we have not even mentioned what would happen to prices if there is a major weather concern this spring/summer. This is shaping up to be the most dangerous marketing year since 1973. Be very careful, avoid speculation, avoid being overconfident that you know what the market may do, and make sure to evaluate the huge potential risk you face in each position.


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
March-14-08
Purdue University