Higher corn production mathematics
Expectations are that corn acres for 2012 will increase. These additional acres are considered marginal, and some have argued that they will act as a drag on yield trend. We’ll suggest this just doesn’t matter.
Let’s do some math. We’ll start with the additional acres:
The bulk of the additional acres are in the western and northwestern regions of the Midwest. Some of the acres are from areas abandoned due to wet conditions last year. These acres are not, and never were, expected to yield near levels of Illinois, Iowa or other key parts of the Midwest.
Assume a national yield of 163 bushels per acre, 95 million planted acres and total corn production of 15.485 billion bushels. Let’s assume the 3.0 million acres that were added to planted corn acres averaged a yield of, say, 140 bushels. The 140-bushel yield on additional acres is a 23-bushel drop, and could act as a drag (or reduction) on total production by 69 million bushels, or .4% of total production.
Now let’s look at another factor:
Iowa and Illinois produce, on average, nearly 34% of the nation’s corn crop, or about 17% for each state. That means these two states would produce 5.265 billion bushels. An increase of 5% yield in Iowa and Illinois alone could equate to an increase in production of over 260 million bushels. This is a far greater impact than the yield drag of 69 million described above. Even a 1% or 2% increase (which is more likely) would equate to an increase of 51.6 million to 106.6 million bushels.
As you can see, it takes only a small yield improvement in just two states to increase the overall national production. And if the nation as a whole (especially the key surrounding states of Indiana, Minnesota and Nebraska) increase yield even 1%, it’s easy to see how much a small yield increase in these states will dwarf the argument of a yield drag from marginal additional acres.
It boils down to weather. With good weather, the nation will be swimming in corn. Poor weather will tighten supplies. Whatever happens, our message is to be prepared. In our simplified example, we make the argument that, despite adding marginal acres, production and national yield could rise, perhaps sharply. It is best to be prepared for good weather and lower prices. Defend sales with call options.