“Even though prices (corn) are at the highest level since July 2008, some analysts are projecting even higher prices, with $7 being a favorite target. The obvious question is: Why are higher prices needed?” asks Darrel Good, a University of Illinois ag economist.
Good explains the role of the corn market is twofold. First, corn has to be priced so that current supplies last until the next harvest. Second, corn prices have to motivate sufficient production in 2011 to meet needs during the 2011-12 marketing year. This second objective is met primarily by directing acreage decisions in 2011.
“The issue of allocating current supplies is typically evaluated based on the pace of consumption relative to available supplies. If consumption is proceeding too rapidly, so that supplies are likely to be consumed before the next harvest, prices increase to slow the pace of consumption,” Good says.
For the current marketing year, corn supplies are estimated at 14.382 billion bu., and consumption is projected at 13.48 billion bu.
“Stocks at the end of the marketing year are projected at 902 million bu. Year-ending stocks cannot realistically be reduced much below the projected level so there is little room for consumption to exceed the projected level,” Good says. “The USDA is forecasting a generous level of feed and residual consumption of 5.4 billion bu. It is unlikely that the pace of consumption exceeds the projected level.”
Feed and residual use of corn is the largest segment of U.S. corn demand, but the rate of consumption cannot be calculated until the release of the Dec. 1 Grain Stocks report on Jan. 12.
According to Good, corn exports during the current marketing year are forecast at 2 billion bu. The total is only 13 million more than was exported last year.
Further, Good points out USDA forecasts that 3.1% more corn will be used for ethanol production during the current marketing year than was used last year. During the first eight weeks of the marketing year, ethanol production exceeded that of a year ago by 18%. If the current rate of increase in ethanol production continues, corn use would exceed the projected level of 4.7 billion bu. by 680 million bu., he says.
“Such a large rate of increase will not be maintained, and feed use of corn will be reduced if production of distillers' grain exceeds the current projection,” Good says. “Still, corn is currently being consumed too fast and a substantial slowdown is required.”
Good adds that the Nov. 9 updated corn production forecast, prospects for Chinese imports of U.S. corn, and the fate of the 45¢/gal. blender's tax credit for ethanol will add further information to the assessment of the pace of consumption.
“A case can be made that old-crop corn prices need to move higher to slow the pace of consumption. Prospects for new-crop prices are not as clear. Current prices may be high enough to attract sufficient acreage in 2011. If not, those prices may have to increase later,” Good says.
For the week ending Oct. 31, according to the National Agricultural Statistics Service:
Corn—91% of the crop is in the bin, which is 67% ahead of last year and 30% ahead of average. That’s the earliest date since 1991 that harvest surpassed the 90% mark.
Soybeans—Harvest is 96% complete, 46% ahead of last year and 17% more than average. In Iowa, harvest was complete on nearly all soybean fields in the northern two-thirds of the state, while a small amount of acreage in the southern third remained standing.
Winter wheat—92% is planted, 11% ahead of last year and 2% ahead the five-year average. With mostly ideal fieldwork conditions prevailing throughout early fall, seeding was complete or nearly complete ahead of the normal pace across much of the Pacific Northwest and Great Plains. 73% has emerged, 8% ahead of last year and on par with the five-year average. While generally dry conditions in portions of the central and southern Great Plains negatively impacted the emerging winter wheat crop, recent improvements in soil moisture levels across the eastern Corn Belt boosted crop establishment. 46% is reported in Good to Excellent condition, 18% less than at the same time last year.
Sorghum—82% has been harvested, 42% or 26 days ahead of last year and 21% ahead of the five-year average. Producers throughout the central Great Plains continued to take advantage of nearly ideal fieldwork conditions, harvesting 12% or more of their crop during the week.