Strong demand for U.S. corn is helping steady the market despite projections for burdensome supplies at year's end, according to Darrel Good, Extension economist, University of Illinois, speaking at the Ag Market Network's November teleconference.
According to Good, demand is not strong enough to offset the surplus supplies — which come on the heels of record U.S. production — but is strong enough to warrant the need for a large crop in the coming year.
Good added that there is historical evidence suggesting the U.S. corn crop could increase in projected size again when USDA's final production estimate is released in January.
“However, I find it hard to believe we would increase very much from this level of production estimate. We are looking at record yields of 160 bushels per acre. That's almost 20 bushels higher than last year's record. I don't see a lot of room to go much higher.”
The rest of the world has also seen recovery in corn production, noted Good. “The Argentine crop is going to be a little bigger than last year's disastrous crop. Brazilian production is up, and there is a very large production increase coming this year in China.”
The bright side for corn is use, according to Good. “We are expecting the U.S. crop to be used at a very hefty rate in all three categories of consumption.”
Domestic processing — “Forecasts are pretty solid for a 15 percent increase in corn use for ethanol this year. We have production capacity in place and new capacity coming on line almost continuously. With high petroleum prices and low corn prices, there will be a lot of motivation to produce ethanol this year.”
Domestic feeding — “USDA has forecast a very large increase in corn feeding this year, 5 percent more than last year. That's a larger increase than you would expect based on the current livestock inventory. We are seeing some modest expansion in hogs, a more robust expansion in broilers and reduced numbers of cattle on feed.”
Exports — The most uncertainty for corn demand is on the export side, according to Good. “USDA is projecting a sizable increase in U.S. shipments this year, and that's being supported almost entirely by expectations that China will have less corn to export.
“China reduced export shipments sharply last year by 300 million bushels, and is expected to reduce shipments another 150 million bushels this year. That business should come mostly to the United States.
“Currently, the export pace is on the slow side, so there is some concern,” Good said. “China is still selling some corn into the South Korean market. But all in all, we will use a record amount of corn this year.”
USDA's forecast for U.S. ending corn stocks of 1.8 billion bushels “is not huge, but it's the largest in the last four years,” Good said.
Good noted that the mid-point of USDA's projected season average farm price for corn is $1.90, equal to the average price during 1998-2001, the last period of large grain surpluses. Comparing other indicators, Good believes the value of this corn crop is somewhere around $1.90 to $2 per bushel.
“Cash prices are expected to bottom very early in the marketing year, Good said, “and in this part of the world, we've seen the cash price bottom the early part of this month (November). That's consistent with history.
“In these kinds of years, there is also a strong pattern that fall lows in the cash market are followed by highs — usually in the spring and early summer, May, June and into July — significantly above our harvest highs and lows.
“The average rebound from harvest lows to spring highs is about 60 cents a bushel. I don't see any reason why we won't do that this year. We may have a slow recovery of prices through the winter months that will be influenced by how fast we use this crop. We would expect prices to be more sensitive as we start a new production cycle this spring.”
Good stressed that the market cannot give up corn acres in 2005, assuming a return to more normal corn yields, “and that is going to support prices. If we have our typical concerns about the weather cycle in 2005, that's when we would expect cash prices to take on more strength.”
Early lows and a slow winter recovery with marketing year highs in the spring “open a couple of alternatives from a marketing standpoint,” Good said. “If we're confident that cash prices are putting in seasonal lows, we recommend establishing the loan deficiency payment on much of the crop.
“Is it safe to hold that in storage unpriced into the spring? I think that has low risk, and I would not be opposed to doing that on a portion of the crop.
“We also need to recognize that there is a decent carry in the corn market. For those who have low-cost storage, there is some opportunity to take the LDP and forward price that crop, capturing the carry in the corn market and netting a price well above the loan rate.”