Have Corn Production Prospects Increased?

June-18-09

Spring corn prices reached their peak in early June with concern over delayed planting. July futures reaced $4.50 per bushel and new crop December $4.735. The turning point for corn was related to both weather and to the bottoming of the U.S. dollar on June 2. So, just how much improvement has there been in production prospects and what do these mean for summer corn price prospects?

The market seems to have forgotten the late planted crop in the Eastern Corn Belt. Whether the lateness will have an impact on yields will depend on growing weather during the rest of the season. Late planting makes crops more vulnearble to stress conditions in July and August. Warmer and dryer than normal would be the prescription that cuts yields. Another important indicator supporting near normal yields is the weekly conditions from USDA. As of the June 15 report, the crop condition was average to slightly above average which would be associated with normal to somewhat better than normal yields. However, it remains too early to say that crop conditions are a reliable indicator of yield. That reliability increases sharply by mid-July in mosts years, but the late plating this year probably means it will be a few weeks later before the crop conditions report helps us more accurately target yields.

Of more immediate significance will be the arrival of hot weather for the middle of the country in the last 10 days, or so, of June. Heat will initially be positive for corn development and yields. The critical facotor will be how long heat continues and if it is also associated with dry conditions. The monthly long-range forecast from the National Weather Service on June 18, suggest a cool July with equal chances for precipitaion to be near, above, or below normal. In genreal, the longer range summer forecast is not threatening to the size of the crop.

Also of considerable importance to corn production will be the final number of corn acres. The June 30 report will be strongly anticipated, but may not be an accurate reflection of actual corn acres especially in the planting delayed states of Illinois, Indiana, Missouri, and North Dakota, where about 70% of the 5.9 million unplanted corn acres on June 1 were located. I continue to expect at least one million less acres and maybe up to a two million reduction as the economics for shifting to soybeans was dominant by late May. The states with substantial planting delays may require added survey work by USDA for the August acreage estimates.

Reducing planted acreage by 1.5 million acres and using 152 bushel yields provides 2009 production of only 11.6 billion bushels rather than the 11.9 currently used by USDA. This would mean ending stocks for 2009/10 would drop to as low as 800 million bushels by August 2010 and prices for the 2009 crop might average from about $4.50 to $5.00 a bushel. This would result in December futures being about $4.60 to $4.80 per bushel. While this is the average of the current estimate, weather can cause yields and production still to vary sharply from current estimates.

The critical week for corn prices tends to be around July 4th. If weather remains favorable with a non-threatening 8-14 day forecast, then expect prices to begin dropping. That decline generally extends into the first week of August when the corn market tends to make summer lows. If weather turns unfavorable (hot/dry), then prices continue to rally through the weather threat.

We generally recommend having at least 25% to 35% of expected corn production priced before July. Those who are not at those levels may want to move their sales position upward.

Demand prospects remain highly uncertain for the 2009 crop. Large financial losses in the hog and dairy sectors mean trimming of those herds and less feed demand. Recovery in the world economy would suggest some modest increase in exports. Corn demand for ethanol should increase in order to meet the renewable fuels standard for 2010, but current EPA restrictions that limit ethanol blends to 10% may limit ethanol production. EPA is expected to make a decision to raise the limits to E12 or E15 by the end of the year, but even that late date could cut 2009/10 corn usage somewhat since the marketing year begins in September.

These demand uncertainties probably mean that corn prices have limited upside potential as $5.00 futures would casue further cutbacks in usage.

The ACRE sign-up deadline is August 14th and odds now favor positive returns to elect
ACRE. There is still some time to make that evaluation as USDA will release their estimates on 2009 state yields and U.S. average price on August 12. Both of these are important in the formula to determine whether ACRE payments will be made for the 2009 crop.

Chris Hurt
June-18-09
Purdue University