Faced with a huge domestic supply of corn, the USDA has projected a marketing-year average price of $1.90, marking the first time since the 2001-02 marketing year that prices have averaged below $2 per bushel.
That grim bit of news was part of the corn outlook presented by Delton C. Gerloff, agricultural economist with the University of Tennessee, during the Southern Region Agricultural Outlook Conference held recently in Atlanta.
U.S. ending corn stocks grew to more than 2 billion bushels last year, says Gerloff, a result of record yields and production. And while the 2005 yield will not equal last year's record, stocks are projected to drop only slightly, keeping the ending stock level above 2 billion bushels for the second year in a row.
“Foreign stocks have dropped to less than half of their 2000 level, and exports are projected to be 2 billion bushels for the first time since the 1995-96 marketing year,” he said.
As recently as the middle of July, the December corn futures price traded above $2.50, but have fallen near $2.05 as of the middle of September, he added.
Looking on the numbers for the 2005-06 U.S. corn crop, Gerloff says that based on previous years' USDA projection accuracy, ending stocks should range from 1,613 to 2,545 million bushels, with 2,079 million bushels as the current USDA projection (as of this presentation). Even at the lower stock scenario, prices would be expected to average only slightly over last year's $2.06 average price, and it will be very difficult to rally prices when faced with a 2-billion-bushel-plus ending stock level, he says.
Ethanol use, says Gerloff, has been a bright spot in corn use. The active export market is the result of a seven-year decline in foreign stock levels, notes the economist. Foreign stocks are projected to be 2.325 billion bushels this year or 40 percent of the 2000 level.
“Much of the drop in stocks has come from China, as their domestic demand has exceeded production over the past few years. So far, China has maintained their export level, increased domestic consumption, and allowed stock levels to fall. At some point, their domestic production must increase, or they will have to curtail their exports, which as recently as 2003 amounted to 600 million bushels. This year, perhaps as a result of lower stocks, their exports are projected to be only 118 million bushels,” says Gerloff.
As of mid September, LDPs had risen to near 50 cents per bushel in some locations. “This situation is partially due to the basis associated with the lack of transportation for early harvested corn and soybeans. Basis should strengthen when port facilities are reopened and barge traffic resumes. There is a possibility that if normal barge traffic transports are delayed well into harvest, export shipments could suffer,” he says.
Looking overseas, Gerloff says Argentina has increased its corn production significantly over the past two years while South Africa and China have remained about constant over the past 10 years. Mexico has taken up some of the reduction in European exports while Japan, Southeast Asia and South Korea have remained fairly constant. If Chinese domestic demand continues to outpace production, China will at some point have to enter the import market, he adds.
Like soybeans, corn basis levels are weak, says Gerloff. In some areas, January cash contracts are 45 cents per bushel higher than the current cash price. “If storage is available, farmers should consider taking the LDP and cash contracting for January delivery. In mid-September, the January price plus the LDP would constitute a price of more than $2.65/ per bushel in some areas of Tennessee, less storage costs. With the December contract making new contract lows, weekly data suggests price support in the $1.95 to $2 area. If this crop gets any bigger, prices could fall below $1.95.”
After harvest, he says, local cash prices should rise as basis levels strengthen. “Demand has been and likely will remain strong for both domestic and foreign markets. Unless the transportation problems on the Gulf are extended well into harvest season, local cash prices should recover after Jan. 1. But any rallies above $2.25 in the futures or local cash market appear doubtful as long as domestic ending stocks are near 2 billion bushels.”
Gerloff advises farmers also to consider pricing a portion of the 2006 crop now. The December 2006 futures contract is trading near $2.50 and is an opportunity to lock in a price that could be well above harvest prices next fall, he says. Unless yields fall significantly next year, U.S. stocks should be adequate to push next fall's prices below the loan rate.