Corn Outlook With a Prayer

October-10-08

“Let me open with a few words of prayer.” That’s the way it feels right now as these violent bearish markets are out of our hands, and seemingly out of the hands of mankind to do anything about.

Of course that is an overly pessimistic statement to start a newsletter, but is reflective of how so many of us feel right now. The great odds favor mankind regaining control of the economic ship, and steering out of what feels like a catastrophic storm.

For now, and until the financial markets reach bottom, it will likely be a deflationary ride. Yes, that’s deflation with general agricultural prices falling. Prices of crude oil will drive corn prices. Cash corn prices will tend to run 4.5% to 5% of the crude oil price per barrel. The current $78 crude means $3.50 to $3.90 cash corn prices. Crude, just a few dollars lower at $70, would mean $3.15 to $3.50 cash corn prices. Crude futures right now are $82 for May 2009—that’s $3.70 to $4.10 corn next spring-probably much lower than most producers are hoping for!

Why deflation for now? Three reasons. First, ag prices were extraordinarily overpriced in the March-June 2008 period and means there is a long way to fall from lofty heights. Second, the current financial crisis suggests recession in the U.S. and a sharp slowing of world income growth. This means weakening demand for agricultural products in the U.S. and worldwide. Finally, the U.S. dollar reached a bottom last spring and has been strengthening. This makes it more difficult for foreigners to buy U.S. agriculture products.

We have heard politicians in recent months say that “the U.S. economy is fundamentally sound.” This statement could also have been made for agricultural markets. Unfortunately, the error in this statement is that our fundamental data is often one or two months behind today’s reality. On the other hand, the stock and ag commodity markets are forward looking…they have to anticipate what will happen in coming months and that picture may not be fundamentally sound because demand for agricultural products will be affected by the ultimate direction of world economies in coming months.

Finally, let’s mention the power of emotion. The boom in agricultural prices gave us a false sense of a “new era of high prices.” The traditional view that $3.00 corn prices were high was moved upward to $5.00. Yet by historical standards, prices today are still high. Today, October 10, 2008, the December 2008 futures are at $4.08 which is the highest December futures price ever on this date. Let me say it once more: “corn futures prices are still at record highs by historical standards.”

For corn, the balance sheet fundamentals changed little in the October updates from USDA. Production was increased by 128 million bushels and resulted in an increase of about the same amount in anticipated ending stocks. This represents just 33 days of stocks on August 31, 2009 and the tightest situation since 1995/96. USDA kept usage relatively stable adding a bit to feed use and subtracting a bit from anticipated ethanol use. USDA could perhaps be criticized for not reducing U.S. and world demand more for the current financial crisis; on the other hand, the negative impacts on income have not yet been measured by our lagging statistical indicators such as U.S. GDP growth for the third quarter which will be released October 30th.

Are there reasons to be optimistic? The prospects for stronger crop prices lie first with a better functioning of the banking and financial sectors. The current problem is that banks are hesitant to lend to each other and this is slowing down the liquidity that everyone needs to meet the day-to-day needs to run their organizations. Most feel that an indicator of improvement in bank liquidity will be reflected by various stock market indexes. Signs of a bottoming stock market will probably reflect a bottoming corn market. Then some period of re-inflating of prices may occur. In the longer-run it can be anticipated that greater allowance for inflation in out general economy may be accepted as a way to help cushion the costs of such massive government expenditures for two wars this decade and now numerous financial rescue packages.

Marketing your crops is beyond challenging. Harvest tends to be the lowest price of the marketing year, and this year we have the added weight of a financial crisis to drag corn prices. Current bids across the storage season suggest an increase of about 60 cents per bushel in prices into next spring. For those with on-farm storage, and assuming 6% interest, this will net about 40 cents return above interest costs. Commercial storage appears to be about breakeven (as it often appears at harvest). Those storing in commercial space would likely receive a positive return if prices rally from the day they store or a negative return if prices fall.

Most knowledgeable people believe that world governments will be able to deal with the financial problems and thus establish greater certainty and price stability over time. Unfortunately no one knows when that will occur. If it occurs in the next few months, then corn prices may be able to recover back to the $4.50 to $5.00 range by next spring. If it is slow to occur, and the damage to world income is larger, then prices may still have further to go on the down side. Unfortunately, at this writing, there is only “hope”, but no clear sign of a bottom.

Many producers have some crop forward priced at much higher levels. Diversification in pricing through the upcoming marketing year will provide near average prices; avoiding the lows, but also locking out opportunity of highs. Each farm’s financial condition is critical to marketing decisions. Some must now “manage for survival.” Those who can take on the risks will probably favor storage and recovery in prices, but may also say a prayer that the financial crisis is but a memory by next spring.

Chris Hurt
October-10-08
Purdue University