Not Enough Corn for 2008/09

May-13-08

Can the U.S. raise enough corn in 2008 to meet the consumption base that is developing? The answer is probably not; at least not everyone who has been using U.S. corn will have that opportunity in the 2008/09 marketing year. Take as an example the consumption base from the 2007 crop at 13.0 billion bushels and add another 1.0 billion bushels of new ethanol capacity. That gives a base of 14.0 billion bushels of use, but USDA’s first projection of crop size is only 12.1 billion bushels. This means two things will occur. First, end users must cut back on consumption and secondly, corn stocks will be reduced to bare minimums by August 2009.

Which of the end users will cut back on corn consumption? USDA has made their first projection and say it will be almost everyone. They have cut the amount of corn the animal industry will use from 6.15 billion from the 2007 crop to just 5.3 billion from the 2008 crop. This reduction of 850 million bushels can be adjusted by about 250 million bushels of corn equivalent that will come from feeding distiller’s grains. So that means a reduction of around 600 million in feed/residual use or a 10 percent cutback.

Foreign buyers will have to cut back on U.S. corn supplies as well. USDA suggests they will reduce purchases from the record 2.5 billion bushels to 2.1 million or a 16 percent reduction. These huge reductions will be necessary to accommodate another one billion bushels of corn for U.S. ethanol which will reach 31 percent of total corn use. This is up from 14% for the 2005 crop. Most importantly, ending stocks in August 2009 will be depleted to just 763 million bushels, a mere 22 day’s supply.

There is much to be determined before we reach August 2009. Final corn acreage and yields are the first to consider. Corn planting is late in the Eastern Corn Belt, but desperately late in the Western Corn Belt. Minnesota and Missouri are about 50 percentage points behind on corn planting. Iowa and South Dakota are each 30 percentage points or more behind as of May 12. The nation is 26 percentage points behind the five year average. This season is the latest corn planting rate for which I track data back to 1980. Late planting is associated with lower corn yields on average across the country.

Summer weather is much more important to yields than planting date. So, I would reduce the expected yields by about three bushels per acre now to 151 bushels per acre, but since summer weather determines maybe 75 to 80 percent of the yield, a favorable weather summer could still bring yields back to, or even above trend.

Planted acres still remain unknown. Economic returns continue to favor planting corn in the Midwest through late May, even if expected yields have started downward due to late planting. This is because corn prices are so strong relative to soybeans. Purdue budgets and market prices on May 13, suggest more than $100 per acre higher expected returns for corn compared to soybeans. This means that late planted corn yields could drop 20 bushels per acre before soybeans begin to show greater returns. In addition, soybean seed is difficult to secure.

I’m estimating that corn acreage will be at 88 million acres compared with the USDA survey level of 86 million acres. With 151 bushel yields, this would mean a crop size of 12.2 billion just slightly higher than the current USDA number. Continued cool weather suggests slow progress on completing planting. This should continue to be a price friendly factor.

Finishing old-crop pricing now should be considered except for those bushels one wants to “bet” on a weather scenario this summer. Once the corn is planted, some concerns will be reduced until the summer weather patterns begin to develop. This may mean a period of somewhat lower prices in late-May and June.

Corn prices have reached the levels mentioned in past updates ($6.40 July futures and $6.50 on December futures). Bids are generally 8 to 12 cents higher for July delivery, so consider pricing on-farm stored corn for July delivery. Generally, commercial stored corn will not cover the added storage costs to July.

Without 2008 weather problems, corn prices may be near their highs. First, consider new crop wheat bids in the range of $6.00 to $6.50 per bushel. Corn has about 90 percent of the feeding value of wheat which means corn might be capped at about $5.40 to $5.85 per bushel if there is sufficient wheat to begin feeding some to livestock. Very good wheat yields could lower those numbers. Secondly, ethanol processor’s current corn breakeven prices are about $5.75 per bushel with record high crude oil around $125 per barrel. They can bid somewhat higher on corn prices, but will begin to move into losses. Of course the direction of crude oil will also be important with higher crude potentially related to higher corn prices.

The 2008 crop will be the tightest corn supplies yet in the biofuels era. This means prices will remain strong, but there are limits to how high that price can be. December futures at $6.50 had been the objective and that has now been achieved, so consider pricing up to 40 percent of expected new crop production.

A number of elevators have restored their new crop pricing programs with calmer price movements in recent weeks. Basis bids are generally still wider than I believe they will be at harvest. This favors working with a commodity broker to establish new crop futures or options positions. However, many will prefer to work with their elevator manager as normal and not spend the summer worrying about potential margin calls from their broker.

There is a long way to go. The market has little idea of actual planted acres this year; yields are clearly not known and will depend on summer weather; usage will need to be cut sharply and we do not know who is going to cut back.

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
May-13-08
Purdue University