Most years when farmers are coming off three straight seasons of bin-busting crops, economists would say, prices more than likely are going into the tank. (Well, economists probably wouldn't say it that way, but you know what I mean.)
Until USDA's latest crop production report, U.S. corn farmers appeared to be on track to harvest their third straight 11-billion-bushel-plus crop, starting with the record 11.8-billion-bushel harvest in 2004. (The October report lowered the previous month's 11.1-billion-bushel forecast to 10.9 billion due to dry conditions in the central Corn Belt.)
Even with 200 million fewer bushels in 2006, three years of 11-billion-bushel harvests would normally have sent corn futures tumbling. Instead, Chicago Board of Trade December futures were trading at a historically high level of $3.44 per bushel at press time.
Corn futures prices could continue to improve in late fall and winter, according to Kurt Guidry, agricultural economist with the LSU AgCenter. Guidry spoke on the outlook for wheat and feed grains at the Southern Region Agricultural Outlook Conference in Atlanta.
Why are corn prices moving higher when supplies are growing by leaps and bounds? Because the demand for corn could actually soak up most of those added bushels of corn, he says.
“I do believe that the domestic demand will be relatively strong and that export demand will be strong,” Guidry said. “I think we will see seasonal improvement in the remainder of 2006 and into 2007.
“I think we can see considerable upside potential in the next few months and thus the need for some upside protection to be able to capture some of that potential,” he said, referring to the need for hedging the 2007 crop.
Those higher prices are expected to attract more acres into corn in 2007, he said. A few days before he spoke in Atlanta, Informa Economics, the Memphis-based agricultural and commodity market research, analysis and consulting firm, said it expected 2007 corn plantings to be up 4 million acres.
But with the nearly 600-million-bushel increase in demand for corn for ethanol that USDA is projecting for the 2006-07 marketing year (June-May), “we could use most of that up in ethanol,” says Guidry.
You have to go back to the mid-1980s to find corn supplies approaching the levels they are now, he notes. In 1986 and 1987, beginning stocks and production combined to push the available supply to 12 billion bushels each year. Current supplies are expected to hit 13.14 billion bushels in 2006, down slightly from 2005's 13.24 billion.
The difference between then and now is that demand in 1986 and 1987 only accounted for 7 billion to 8 billion bushels, pushing carryover stocks to a record 5 billion bushels in 1986. Corn demand is expected to reach nearly 12 billion bushels or 1.2 billion bushels below the expected supply of 13.14 billion bushels for 2006.
As a result of the phenomenal expected offtake, corn-ending stocks could drop to 1.2 billion bushels or 9 percent of total supply for the 2006-07 marketing year.
Ethanol demand is playing a big part in the dramatic increase in usage. USDA expects the amount of corn going into ethanol production to rise from 1.6 billion bushels in 2005-06 to 2.15 billion in 2006-07. The latter would be up 1 billion bushels from 2004-05.
But exports are also on the rise with USDA forecasting an increase of 100 million bushels from 2.15 billion in 2005-06 to 2.25 billion in 2006-07. “It appears that exports from other countries will be off,” says Guidry, “so U.S. corn exports could be relatively strong, reaching the highest levels since the early 1990s.”
Little of the increased demand for ethanol will filter down to the southern states since most of the boom in biorefinery construction is taking place in the Midwest. The Renewable Fuels Association estimates that 44 such plants are currently under construction and will soon join the 101 plants now producing ethanol and biodiesel.
Only two such plants are located in the Southeast — one in Georgia and one in east Tennessee, he said. The majority are concentrated in Iowa, Illinois, Minnesota and Nebraska.
One ethanol plant opened in Louisiana but has since closed due, in part, to the economics of growing corn and transforming it into ethanol in the state. “We're talking about five more plants in the state now,” he noted.
As long as input costs remain high, expanding Louisiana's corn acreage will be a difficult proposition. Farmers in Louisiana and elsewhere are expected to pay 32 percent more for diesel and 12 percent more for fertilizer in 2006 than they did in 2005. The price of natural gas for industrial use — and for nitrogen fertilizer — is expected to turn up again in 2007 after declining in late winter.
When Guidry spoke in Atlanta in late September, December 2006 corn futures were trading at $2.55 per bushel. At press time, December 2006 futures had risen to $3.44 per bushel. The jump was not that surprising when you look at historical price relationships.
“There have been four times when the stocks-to-use ratio has been less than 11.11 percent in the last 35 years,” says Guidry. “When that has happened, corn prices have averaged $2.81 per bushel and corn exports have averaged 1.66 billion bushels for that year.
“When you think about it, the current December futures prices of $2.55 per bushel is a little low given the market expectations for increases in ethanol use and corn exports.”