Will a Short 2009 Corn Crop Jeopardize 2010 Ethanol Production?

May-22-09

Has late corn planting in the Eastern Corn Belt jeopardized the size of the 2009 crop? The answer is YES, however the magnitude remains more difficult to estimate. Illinois, Indiana, and Ohio are the major production states that are far behind. As of May 17, those three states contained 16 million acres of corn ground that had not yet been planted. Illinois faces the most severe lateness being 72 percentage points behind the five year average. Indiana was 61 percentage points behind and Ohio 43 percentage points behind.

The completion of corn planting is now expected to proceed rapidly given prospects for favorable drying and moderately low precipitation odds through the end of May in the Midwest. Two factors put 2009 in greater jeopardy. The first is the potential yield impacts of late planting and the second is the potential for farmers to shift some acres from corn to soybeans due to the lateness.

Late planted corn does not guarantee reduced yields, but it does increase the odds that yields will be negatively impacted. What really determines yields is weather in June, July and August. Late planting will tend to lower yields if summer weather is normal. Darrel Good at the University of Illinois has estimated that Illinois’ summer weather would have to be about one standard deviation better than normal to achieve normal Illinois yields this year. Better summer weather is cooler and wetter than normal. The “better” weather would roughly occur with odds of about one out of six years. Assuming normal weather this year he concludes Illinois yields would be about 22 bushels below trend (see, http://www.farmdoc.uiuc.edu/marketing/weekly/html/051809.html ). For Indiana, my estimates are for a 10 to 15 bushel per acre yield decrease due to late planting, with a point estimate at 12 bushels per acre. Late planting in Illinois, Indiana and other states reduces national yield potential to perhaps 152 bushels per acre.

In addition, there is the question of how many intended corn acres will be shifted to other crops, primarily soybeans. There are reasons to expect some shift. First rapid ascent of old crop bean prices this spring may encourage some; low input costs compared to corn also favors some shifting; as does the already mentioned late corn planting. Returns above variable costs appear favorable for soybeans rather than for corn, especially if some yield reduction is expected from late planted corn. In late planting years of 1984, 1993, and 1995 corn acreage dropped by 1.8 million, 2.2 million and 2.5 million acres. The statistical relationship between planting date and corn acreage shifts from the March intentions to the June estimate is weak, but would suggest about 1 million acres could move out of corn and primarily toward soybeans.

The implications of both one million acres less corn and yields dropping to 152 bushels per acre would mean a crop of 11.7 billion bushels, 400 million less production than USDA’s May projection of 12.1 billion bushels. Given USDA’s first estimate of usage at 12.6 billion, a crop of only 11.7 means some cuts in their usage estimates would be necessary and those prices would have to be high enough to force end-users to make those needed cuts.

Those cuts in usage might come quickly this year since both the animal industries and the ethanol industry have negative margins right now. Higher corn/feed prices would be discouraging.

A short corn crop would also have implications for renewable fuels. The Renewable Fuel Standard (RFS) is set to increase from 10.5 billion gallons in 2009 to 12 billion gallons in 2010. That will require about 350 to 400 million bushels more corn compared to this year. It is the responsibility of the EPA administrator to make a decision in November/December of each year if the RFS can be met for the coming year. If there is a reason that the RFS would cause hardships, the EPA administrator can reduce the size of the RFS for the coming year. Clearly one of the likely hardships might be a short corn crop. If growing season weather should turn adverse, the likelihood of a cutback in the RFS for 2010 will grow. This may become another factor that would limit upside price movement on corn, even with a harmful weather situation this summer.

Finally, a short corn crop this year will renew the heated 2008 debate over food vs. fuel. If corn production is short enough, the Administration (EPA) will have to make some hard choices between those two industries. If crude oil and gasoline prices stay low/moderate it would make it easier for the EPA administrator to reduce the RFS and import more oil. This would tend to help keep feed and food price increases more moderate and thus be more beneficial to the animal industries and to food consumers.

However, any reduction in the RFS for 2010 will likely have adverse impacts on others. Corn farmers would like to see corn prices continue to rise to help compensate for lower production and a reduction of the RFS would keep corn prices lower. Ethanol producers would also be harmed by cuts in the RFS as their margins could remain negative and the amount of unused capacity that is not in operation in 2010 would be higher than if the RFS mandate remained unchanged.

Chris Hurt
May-22-09
Purdue University