The fundamentals are in place for an improved corn market in 2002, says George Shumaker, University of Georgia Extension economist.
“Global ending stocks are pointed in the right direction — they're declining as we enter the 2002 crop year, and that's a positive sign,” said Shumaker at the recent Georgia Corn Short Course in Tifton.
There typically is a good relationship between ending stocks and corn prices, he adds.
Another positive factor, he says, is the current turmoil in Argentina. “Argentina is one of our competitors in the international market, and they've been in the news a lot lately because of the economic turmoil occurring there. They've also experienced weather problems with their corn crop,” says Shumaker.
Working on the premise that a new farm bill probably won't be in place in time to affect Southeastern corn plantings this year, Shumaker predicts a “small rebound” in corn acreage.”
“Some of that rebound likely will occur in the Southeast. Harvested acres should be up a little bit from where they were this past year. As far as yields go, Mother Nature always has been good at helping to determine the final size of the crop, regardless of how many acres are planted. It'll all depend on weather conditions throughout the United States this year.
“Over the past six years, we've seen generally good growing conditions. Historically — every once in a while — Mother Nature comes in and has an impact on our crop. This usually occurs about one in every five years,” says the economist.
The drought monitor, says Shumaker, indicates that the Southeast still is dry, and it's being forecast that the region will remain dry. Dry conditions also persist in the western edge of the Corn Belt, he says, and a mild winter with no snowfall hasn't helped the situation.
“This is a major wheat-growing area, and they have a major drought problem. If the size of the wheat crop is reduced, it'll reduce the amount of wheat going into feeding. This could, in general, be a positive factor for our corn prices,” he says.
Drought is expected to continue in the Southeast according to projections from NOAA, says Shumaker. Some forecasters, noting that the region currently is between the La Nina and El Nino weather effects, predict that the drought will tend to move north, he says.
Going into the 2002 crop year, there will be less grain in the bins than at the same time last year, he continues. “Our total supply of corn will be less this year, and that'll mark the second consecutive year that we've seen a reduction in supplies. That's another positive price factor.
“It takes two sides of the equation to make a price. In addition to the supply side, we also must look at demand, and there currently is strong demand for corn.”
Total grain-consuming units — or the amount of grain fed to livestock — will remain very steady as farmers move through the marketing year of the 2002 corn crop, notes Shumaker.
“The amount of corn used for domestic or human consumption is larger than our export market sector, and that trend likely will continue. Exports will become less important as a ‘market maker’ for us than the use that we're able to generate domestically.”
Another positive factor for the corn market is ethanol production, he says. “There currently are 17 ethanol plants under construction throughout the United States. If these plants come on line, we could see a significant increase in the amount of corn used for fuel. The feeling in the country now is that we should produce as much energy as possible ourselves so we won't have to rely on international sources, and that's a positive sign for the corn market.”
If all of these positive factors continue, there's very good potential for higher corn prices this year, says Shumaker.
“There's a very strong inverse relationship between the relative size of our ending stocks and our prices. When the stocks-to-use ratio goes up, prices go down, and when the stock-to-use ratio goes down, prices increase. We're looking at the possibility of drawing these stocks down to around 12 to 13 percent, and that should boost our prices. I think we'll see season-average cash prices close to the $2.50-per-bushel level this year.”
A good goal for Georgia corn growers this year might be to sell their crop at about the $3-per-bushel level, says Shumaker.
“If you're going to shoot toward that $3 goal, you'll want to price at that “high” time of the year. We typically get our best corn prices earlier in the year. So, you probably want to think in terms of using some form of a forward pricing strategy that will allow you to take advantage of prices that are above the average for the year, rather than selling when the price is below the average for the year.”
It's helpful, he says, to go back and look at the history of corn prices. For example, in two of the last three years, a grower could have made money by forward pricing, he adds.
One strategy that might be considered is what Shumaker calls the “two for one gambit.” With this strategy, we're trying to make this market pay us two cents for every one-cent move. If the market should go below our posted county price, then we see an increase in our LDP.
“We gain money on the put as the market falls, and the put value increases as our LDP rises. Anytime we get a price dropping below our posted county price, we have the opportunity to pick up two cents for every one-cent fall. If we pick up an LDP, and add that to what we're going to sell for, we could approach $3.”
Some growers, says Shumaker, might consider marketing their corn crop as silage rather than as grain. “To estimate how much silage might be in the field, estimate you grain yield and divide that by 7.94. That'll be the estimated tons of silage in the field. To put a price on the silage, get a price quote for grain and multiply that price by 7.94. That'll be the in-field value of that silage. If you're located near a dairy, this strategy might work for you.”