A new plateau for corn prices would nice, but is it realistic?
Each month the USDA publishes its World Agricultural Supply and Demand Estimates (WASDE) that gives an up-to-date estimate of the US and world markets for major agricultural products.
On October 10, 2008 the new WASDE was released. We were interested to see the corn production number given all of the concern over delayed corn planting due to spring floods and wet weather in the upper Midwest.
Given the absence of a widespread early frost in the flood affected areas, the USDA raised the projected national corn yield by 1.7 bu/ac from the September report and reduced the projected harvested area by 100 thousand acres. The result was a projected increase in US corn production of 128 million bushels resulting in a projected harvest of 12.2 billion bushels, the second largest US corn harvest in history.
The report also made some adjustments in utilization resulting in an ending stocks level of 1.154 billion bushels, an increase of 136 million bushels from the previous month's projections.
Based on an increase in stock levels and a down-trending corn futures market the USDA also reduced the projected price range by 80 cents on each end resulting in a new midpoint of $4.70 for the projected season average price paid to farmers.
As we write this column the December futures corn price -- not the season average price paid to farmers -- is $4.01 after spending two days in sub-$4.00 territory. Less than four months earlier, on June 27, 2008, corn hit a high of $7.96, nearly double today's close.
Back in June we heard a lot of talk about a new price plateau. Today corn farmers are just hanging on. Looking at the report we wondered how close the projected price might be to what farmers could expect.
Looking at a long-term model that we use to help us explain what is going on in the corn market, we examined what has happened over the last two years and then developed three scenarios of what corn farmers might expect.
In 2006, the season average corn price was $3.04. By our model that was nearly 92 cents higher than the 11.6% stocks-to-use ratio would typically produce. A price premium became built into the market during that time because of concerns over having adequate supplies to meet the needs of a growing corn-to-ethanol industry.
For the just-ended 2007 crop year, corn prices were affected not only by ethanol demand but also by the massive entry of index funds into the commodity markets. These funds bought long as a hedge against future price increases. In the end, many observers think that these funds helped drive the corn price higher than it would have otherwise gone.
Be that as it may, the season average corn price paid to farmers reached $4.20 on a stocks to use ratio of 12.2%. Our model estimated a price exactly half that large, $2.10 rather than $4.20.
That is, according the model the two effects -- ethanol expectations and index funds, plus other possible influences -- raised corn prices $2.10 per bushel above what would have been in the post-1996 farm bill era for an identical ending year stocks as a percent of corn utilization.