Corn Market Gets Flushed!

July-14-09

Recent USDA reports turned sharply bearish and summer weather has generally been non-threatening to yields. As a result, December corn futures fell faster than almost anyone could imagine from a high of $4.67 on June 2 to a low of $3.28 on July 10. The June 30, acreage report added two million more corn acres, when the expectation was for a one million reduction, and the stocks indicated lower usage as well. In the July 10 balance sheet update, USDA reduced usage for feed, and ethanol use and ending stocks for the 08/09 crop year were increased by 170 million bushels to 1.77 billion bushels. This larger carryin for the upcoming 09/10 crop along with the higher acreage meant a 460 million bushel increase in expected ending stocks on August 31, 2010 (1.55 billion bushels).

Has this been an excessive price plunge? Most producers hope so. However, yield prospects right now are probably higher than the 153.4 bushels per acre USDA is using. The national crop conditions (USDA Weekly “Crop Progress” report) are better than average for this time of year. My estimate is that these superior conditions are enough to overcome the impacts of late planting and push yields to 156 bushels per acre which is near trend yields. The current weather forecasts are for a turn toward below normal precipitation in the last-half of July, but with generally normal-to-cool temperatures. Subsoil moisture conditions are mixed: with abundant supplies in the Dakota’s, Iowa, Illinois, and much of Indiana, but with moisture deficits beginning to develop from Minnesota, Wisconsin, N.E. Indiana, and into Ohio. Assuming increasing dryness in late-July, yield prospects may not be as high by August.

Even with yields of 156 bushels per acre yields, carry out for 2009/10 may not expand to more than about 1.6 billion bushels because corn acreage is likely to be less than the June estimate. Usage will expand some as well with lower corn prices. Ethanol margins, as an example, which had been negative almost all of 2009, jumped back to as much as 40 cents per bushel positive on these lower corn prices. Ending stocks as a percent of use would remain in the 12% to 13% range which is about where they were for the 2007/08 crop year that had a U.S. average farm price of $4.20 per bushel.

World corn inventories will remain relatively tight as well. World ending stocks as a percent of usage for the high priced 2007/08 crop were 17%, and current USDA estimate are only 17.5% for the upcoming 2009/10 crop.

World economic recovery will be slow, but we believe it will be positive growth by late 2009 or early 2010, and thus provide the foundation for better utilization than is currently anticipated.

If these assumptions are correct, then corn is too cheap right now. That means livestock feeders should consider some ownership for upcoming feeding needs. For grain producers, it means avoiding pricing right now and seeking storage for the new crop. A more reasonable level for December corn futures may be in the $3.75 to $4.00 per bushel range.

The current depressed prices do remind producers of the need to consider ACRE once more before the August 14th signup deadline. Assuming Indiana yields are 1% to 2% above normal, the breakeven price where ACRE is better than the regular DCP program is about $3.70 per bushel for the U.S. average farm price (this is assuming average quality Indiana land and average yield and acreage bases). The USDA’s estimate of U.S. average farm price for the year is currently $3.75 per bushel (this is the mid-point of their range of $3.35 to $4.15). If this were to be so, then one would likely not get a 2009 corn ACRE payment, so they would be better to stay out of ACRE for 2009, and re-evaluate next year for 2010. However, the futures market close on July 14th with December 09 futures at $3.455 is suggesting that the season average price would be about $3.30 per bushel (this is based on closing futures prices and uses a USDA model to estimate the seasons average price for the 2009/10 marketing year. The model is from http://www.ers.usda.gov/Data/PriceForecast/ ).

If $3.30 is the ultimate season average corn price then corn ACRE payments would be about $45 per acre of corn higher than regular DCP payments for the 2009 crop (again this is on average quality land). You also must remember that to qualify for a corn DCP payment, you not only have to meet the state trigger (this is what I am basing my numbers on) but also your own farm trigger. Thus, if your yields look to above normal this year, then this makes it less likely your own farm will trigger. To the extent your yields look normal or below-normal, then that makes it more likely you will meet your own farm trigger.)

Talk about confusing! The bottom line is that for the 2009 state corn trigger, my best statement is that USDA’s expected U.S. average farm price would not trigger a corn payment, but the low current futures price estimate would meet the state trigger. To the evaluation of the state trigger you must also evaluate whether you expect your farm to trigger based on your 2009 yields and expected U.S. average farm price.

Chris Hurt
July-14-09
Purdue University