More Corn Acres: Please!

April-12-08

According to USDA’s Prospective Plantings, corn acres will drop to 86 million this year down eight percent or 7.6 million acres from last year’s 60-year high. The difficulty is that number is too low to meet the growing corn demands, and thus producers need to shift some acres back toward corn. It is more likely that planted acres will end up closer to 89 million acres.

Producers will not drop corn acreage so much because: First, the reported acres are probably not a good reflection of actual acres because the USDA did their survey in early March when market prices still favored soybean acreage; and Second, during the month of March and early April, the financial incentive has shifted sharply back to corn.

For example, planting incentives on March 3, 2008 were about $30 per acre higher to plant soybeans. However, on April 11, 2008 that incentive was $92 greater t o plant corn over soybeans on average quality Indiana land based upon Purdue budgets http://www.agecon.purdue.edu/extension/pubs/id166_2008_FEB08.pdf The dramatic shift from soybean incentive to corn incentive during March and April has likely caused some acres to move back toward corn. Unfortunately, there will be no USDA confirmation of actual planted acres until June 30.

Wet spring weather is another concern for attaining adequate corn acres. Midwest soils are wet now and the precipitation forecast remains wet through at least April 25. However, for the Southern Plains and Southeastern U.S., the forecast for planting progress during April is more favorable. Of course the Midwest is the dominant corn region and planting delays there will be the market driver.

What factors will drive corn prices in coming weeks? Weather probably is near the top of the list. Ethanol margins remain positive with corn price breakevens estimated at about $5.90 per bushel. This means those plants still have another $.30 more they can pay for cash corn. However, ethanol prices may peak in May and then slowly decline into the summer. If so, cash prices in the very high $5.00 to low very low $6.00 range may be the limit for ethanol plants. This may provide a foundation for May corn futures to move toward the $6.40 level. But for cash corn prices to move higher, may require actual losses of corn acres or yield potential due to late planting.

Pricing of additional old crop corn should be considered in the next few weeks. Pricing all old-crop, other than bushels one is willing to hold to July for weather problems should now be considered. For some, this may be moving up to 80 per cent sold. Even though you price additional bushels in the next few weeks, check to see if June delivery premiums are sufficient to cover storage costs. For some locations June bids are $.15 to $.17 higher than spot bids. For those with corn stored on-farm storage, interest costs with seven percent interest would be about $.08 per bushel, thus providing $.07 to $.09 of gain to price now, but for delivery into June. Generally, those with corn in commercial space should price for immediate delivery and not bear additional monthly storage charges for May and June.

Having 30 to 40 percent of the new crop priced is generally recommended by mid-May. A move of December futures toward $6.50 may be an opportunity to achieve record high new-crop prices. Some elevator managers are not able to offer cash contracts for new crop. In addition, those who are able to offer contracts generally have very wide basis bids. This may encourage some producers to do their futures hedging with their own broker, thus leaving the basis unpriced. Declining ending stocks this August and a much smaller 2008 corn crop tend to favor stronger basis for the fall, not weaker. If 89 million acres are planted, and yields are near normal, then harvest time cash prices might be in the high-$4.00 to low-$5.00 range.

Strategies that set both a floor and a ceiling price on the 2008 crop are also appealing now. For Example on April 11, 2008, December corn futures settled at $6.04. One could buy a $5.70 put to provide downside price protection and establish a floor futures price at $5.70 per bushel, but also sell $7.00 calls. The call establishes a ceiling price of $7.00 on December futures. Thus, a floor futures price is established at $.34 below the market, but there is an opportunity to gain $.96 if subsequent December futures prices should move to $7.00 per bushel or higher. The net premium costs is just $.10 per bushel. To this, you need to add brokerage commissions and pledge margin money against the short call position.

Direct use of futures and options involve different risk and opportunities compared to cash contracting at the elevator. So, be sure to work with a broker or market advisor that will clearly explain these factors, and in whom you have solid trust.

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.
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Chris Hurt
April-12-08
Purdue University