While the fundamentals of the U.S. corn market remain strong, that may be overwhelmed — at least in the short-term — by outside influences.
“Corn trades consistently with oil and the situation in the financial sector — those issues and others are in the driver’s seat rather than corn market fundamentals,” says Mississippi State University Economist John Anderson, who spoke recently at the Southern Regional Outlook Conference held in Atlanta.
The corn and other feed grain markets have been unsettled, says Anderson. “It’s a unique situation and a unique time to try and analyze this. If you look at where we’ve been in 2008, we’ve had this early-season market in all our grains, and it has created a credit crunch for our grain elevators,” he says.
Anderson says he doesn’t remember a time when so much “popular” attention has been focused on commodities.
“What’s behind all this? In terms of grain markets, we can look back to 2006 and 2007, and see that prices really shot up in response to production problems in key parts of the world, including Australia, Canada, Eastern Europe and parts of Western Europe,” he says.
The incredible off-take of corn can be partially attributed to bioenergy policy, he adds. “A lot of factors have worked together, along with increasing demand and economic growth in India and China, contributing to this increase in off-take. Crude oil prices have had a big impact on the economy in general, and that has influenced commodity prices. This has increased production and transportation costs, and that will have an impact, as well as bringing a lot of speculative money into commodities as an inflation hedge,” says Anderson
When you look at what’s going on in the corn and feed grain markets, it all boils down to stocks, says the economist. “You have to go back to that fundamental principle. When we look at USDA supply and demand reports going back to 2000, there haven’t been a lot of times when production has exceeded use — in 2004 and this year, just barely. We’ve had fairly steep increases in both production and use, but use has out-stripped production pretty consistently, and the consequences of that has been a draw-down in stocks,” he says.
There was a sizable jump in the corn and feed grains stocks-to-use ratio between 2003 and 2004, but since then, it has trended downward, says Anderson, with wheat stocks dropping off steeply.
“We’ve held steady in the 2007-08 marketing year, with a little bit of an increase, but not much of one. We did have production exceeding use last year but not by much, and that has stabilized the situation after about three years of going down to a low historic level. The situation has stabilized somewhat, and that is partially reflected in what the markets have done,” he says.
Corn prices, says Anderson, began rising significantly in the fall of 2006. “In 2006, everyone wanted to know if they should book corn. But nobody did, because only an idiot books corn in September. In 2008, we’ve obliterated any previous records in this corn market.”
Corn futures are high, he says, for about as far out as contracts are traded, with December 2008 at $5.60 1/4 and December 2011 at $5.93 1/2.
“The market has pulled back pretty hard from the June highs, influenced by improving crop condition ratings. We’ve also seen the effects of outside markets at work in the corn market, especially crude oil and the dollar. A weak dollar has supported a lot of commodity prices. Corn has reacted to the factors, and we’re seeing a pullback,” says Anderson.
The long-term fundamentals of the corn market are exceptionally strong, he says. “The off-takes are amazing, especially when we consider where those numbers were two or three years ago. The volatility is amazing, and we don’t have a historical perspective.”
There was a lot of improvement in the U.S. corn crop condition rating at the end of June, and now estimates are slightly below where they were at this same time last year, he says.
The effects of other markets on the corn market cannot be underestimated, says Anderson. “There has been a remarkable consistency in the corn market and crude oil.”
In 2007, the U.S. produced 13.07 billion bushels of corn — far more than has ever been produced, he notes. “But this barely increased carry-over because we’re using 12.8 billion bushels. I have some serious questions about whether or not 13 billion bushels is a sustainable level of production — I don’t think it is. Early in the marketing year, USDA projected we actually would use all that we produced in 2007, and 12.8 billion is a full billion bushels higher than the 2004 record production.
“Off-take is incredibly strong. We’ve produced more than we’ve ever produced — more than we’ve demonstrated an ability ever to produce and more than we can hope to produce at any sustainable level — and we used all of it.”
The tight stocks-to-use situation in the corn market won’t be turned around quickly, says Anderson. There are expectations in the market created by the Renewable Fuels Standard Mandate, he adds.
“This is a political issue that is policy driven, but what do the economics tell us about the RFS? It is important in what it does for market expectations of future demand, and more specifically, the stability of future demand. The RFS will continue to have a big influence on corn markets, whether it’s binding or not.”