Some economists have predicted recently the bull market in corn might be reversing to a two to three-year bear market.
Not so fast, counters Mark Welch of Texas A&M University.
“It’s not necessarily over, and I can make the case for volatility, both on the production and the price side,” says Welch.
Judging from world per-capita consumption, it’s a good time to be a grain farmer, he says. “Grain use actually can go down in a recession, but that didn’t happen in the greatest recession since the Great Depression. We blew through that as if it was standing still. We were stepping up consumption prior to corn-for-ethanol making the difference that we’ve seen over the last several years. And that gave us the impetus to carry through the latest recession,” says Welch.
Even though the U.S. is making up a smaller percentage of world corn production, it is still the No. 1 producer and No. 1 user, though exports took a hit this past year, he says.
“We still set the stage for the world corn market. The estimate of 371 kilograms per person in per-capita consumption is a projection in light of the fact that we’ve capped off growth in ethanol. Our livestock numbers are down, but we’re still seeing worldwide growth in per capita consumption. There’s a lot more going on than just ethanol, and that’s what will carry us forward and provide that demand base which will provide for higher prices as we move into the future.”
World per-capita consumption for corn has grown by 28 percent and soybeans by 26 percent over the past 10 years, says Welch.
“World per-capita consumption of wheat is up 3.6 percent, when we are increasing our feed grain supplies and relying less on wheat as a feed grain. If you go back two or three years, consumption patterns of the food grains increase in wheat was flat – zero percent growth over 10 years. Now we’re seeing an uptick in wheat and in rice. So we’re seeing very strong consumption patterns in feed and food grains.
“In that 10-year period when we’ve seen rapid growth in feed grain consumption, where has the consumption come from? All of the growth and then some have come from corn. Everyone wants to be a corn producer, and everyone wants to buy corn.”
Buyers less sensitive to price
Economically speaking, the buyers and users of corn are becoming less sensitive to price in making their purchasing decisions, he says. They want corn, and they’ll do whatever they can do to get it.
“The inverse of that inelastic demand curve is that as we see buyers being less sensitive to price, it means that with very small changes in supply, we see a magnified impact on price. Price is becoming much more responsive to relatively small changes in supply. That is a component of our grain marketing that is going to stay with us for a considerable period of time.”
We’ve built a grain industry around a single crop, says Welch. “Users like the production they get out of corn and the reliability they get out of utilizing corn for rations or ethanol, and that’s increasing throughout the world. That’s a major driver of the volatility we’re seeing in prices.”
In looking at prices paid to farmers for corn going back to 1866, two economic principles are very evident, says Welch.
“No. 1, a price change due to a change in demand is usually sustained for a relatively long period of time. The second principally is equally important – a price change due to a change in supply is usually short lived. There’s a great deal of volatility in this new higher average price for corn.”
Over the last several years, he says, there have been several consecutive disappointing corn crops in the United States while world corn production continues to set records.
Turning to supplies and the days of use on hand at the end of the marketing year, Welch says the U.S. is expected to rebound to the 10-year average with a 60-day supply of corn on hand on Aug. 31, 2014. This will mark the end of the 2013-2014 marketing year.
“If we make a record crop in the U.S. and record crop worldwide, we may get back to the 10-year average.”
U.S. corn-use categories have been driven by fuel use in the past several years, he says. “We’ve heard the case of increasing livestock numbers. We expect continued growth from the feed side of corn use as livestock producers have responded to more profitable conditions and increasing beef consumption in the U.S. and worldwide.”
Fuel use limit has been reached
As far as fuel use, the limit has been reached, says Welch. “We made it to 5 billion bushels, and that seems to be it, given the current structure of the industry. Unless we can export ethanol or use more of it, we’ve done about all we can do for now. We just don’t consume much more ethanol than we did three years ago. There’s not a lot of growth in that industry even though there is some degree of profitability that has come back into the ethanol industry. Since March, we’ve seen profitability returning. When we lost the excise credit in December of 2011, things got a little tough.”
Looking at grain-consuming animal units, poultry, pork and beef segments are pretty evenly divided at about 30-percent each, he says. But since 2007, he adds, the numbers of livestock in terms of grain-consuming animal units have been on the decline, and producers are doing whatever they can to get more pounds out of less grain.
The U.S. has seen its export share of the world market decline, from about 70 to 80 percent share down to about 30 percent, says Welch. Soybeans have dropped to about the same amount, while wheat has gone from 50 percent of market share down to the high teens.
“There are some export opportunities out there. Looking at a 10-year period of grain consumption and production patterns, China has gone from being the No. 2 exporter of corn in the world to being the No. 5 importer. Long-term trade projections for China are for increasing imports for their textile and feed-grain sectors – they will maintain their self-sufficiency in food grain. They will not depend on us for wheat and rice. They’ll import our corn, soybeans and cotton, but they’ll take care of themselves when it comes to food.”
Thirty percent of China’s corn production is for food use, says Welch. China’s corn industry is a much larger component of its food industry than in the United States, where 13 percent of production is for food use.
“Evidently, there is a tremendous prejudice against the human consumption of genetically modified food products in China. They can’t produce it in China, but they’ll import it for their livestock. China’s acreage is as much as that in the U.S., but their yields are about half of ours.”
U.S. crop condition shows improvement
The corn crop condition is much better in the U.S. this year compared with last year when three was severe drought in the Midwest, says Welch. In late September, 45 percent of the nation’s crop was in good to excellent condition.
“Looking at the average crop condition index, our crop was in a little better shape as we got into July. It wasn’t until late August/early September that we saw those conditions slip and then quickly rebound, which is a common occurrence. It looks like USDA’s estimate of 155 bushels per acre is doable. Trend line yields give us an average of 157, so it looks like we’re on track to reach that number.”
FSA is reporting higher prevented plantings, higher abandonment, and a much lower harvested number than NASS is projecting, says Welch. With corn, we’re seeing the average yield estimate tick up. The early yields coming in from the Midwest were much better than expected.”
The University of Illinois, he says, estimates that 8 percent of the U.S. corn crop is grown outside the farm program. So the FSA numbers would account for 92 percent of planted corn acres.
“The trend line projects a yield of 157 this year and 159 bushels in 2014. Can we maintain that rate of growth as we expand our corn-growing areas? There are some definite concerns about that.”
The drought in 2012 dropped corn yields 21 percent below trend, says Welch, whereas in 1988, with a drought of similar magnitude, yields dropped about 25 percent below trend.
“Even if we can maintain that projection of yield growth, the average amount we were above trend from 1980 to 1995 was 8 percent. The average amount we were over trend was 14 percent. From 1996 to 2010, the average above was 3 percent up and 3 percent down. The last 16 years, prior to 2012 was a period of relative stable production in terms of average yields.”
This year’s projected yield of 155 bushels per acre is “just a hair” below trend, says Welch. “This would give us a 13.8-billion bushel crop. That’s holding harvested acres at 8.9 million and yield at 155. Of course that’s an all-time record high corn crop. We could give up a lot of bushels and still have a record corn crop.”
Marginal increase for food
If U.S. feed and residual use continues to increase, it could get back to about 5.5 million bushels, says Welch. He also sees a slight increase for ethanol and a marginal increase for food.
“There will be some export opportunities, so I see us rebounding to average levels of the last four to five years on the feed and export side. In estimating prices for next year, I plugged in different acreages, at 97, 95 and 93 million acres of corn, along with a trend line yield of 159. Currently, USDA is estimating a 1.8 billion-bushel carryover.”
Iowa State University economist Bob Wisner states that given the inelasticity of the demand curve in corn, a 1 percent change in the corn supply can change the price by about 5 percent, says Welch.
“Given our current numbers, with 97 million acres of corn next year and a trend line corn yield of 159 bushels, we’d be looking at a season-average price of about $4.40 per bushel. At 95 million acres, the price would be about $5, and at 93 million acres, about $5.40. There’s a great deal of variability around those production numbers for 2013, which gives us price variability.”
University of Illinois budgets for 2014, using a $250 cash rent and a 200-bushel yield, calculate that the break-even price for corn in central Illinois is $4.10 per bushel.
“So there’s still a good incentive to plant corn. The soybean/corn price ratio and other things will play into planting decisions, but there’s still a cushion there to grow corn with these kinds of numbers. With any kind of acreage question or yield concerns, we could get that price back up pretty quickly, and I think there will be some bargaining opportunities for us.
Wheat price still above average
The six-year price average in wheat is $6.55 and we’re still above that, says Welch. “The U.S. is becoming a smaller and smaller player in world wheat production. We really haven’t increased wheat production since 1960. It continues to grow around the world, and projections for 2013-14 are for an all-time record wheat crop.”
In 2013-14, the former Soviet Union was the largest wheat exporter in the world, with 24 percent of the world’s wheat market.
“USDA projects a 25-percent stocks-to-use ratio in wheat, from last year’s 26.7 percent. That’s a lower stocks-to-use ratio in light of all-time record wheat production. This means our consumption of wheat is keeping pace with the level at which we’re achieving record levels of production. Positive numbers on the demand side are compensation for what looks like a favorable production scenario of world wheat production.”
With a lower stock-to-use ratio in the current marketing year than in the prior marketing year, it sets the stage for higher wheat prices going into January, February and March, says Welch.
“Until corn sets a harvest low, I don’t think wheat is going to be able to stand on its own fundamentally. I would anticipate that we’ll finally set in a harvest-low on corn and allow both markets to achieve a little bit of a price escalation through winter, but particularly on wheat.
The outlook for wheat certainly is bullish in the short term, given what we know right now.”