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Double-barreled drought market questions

This summer’s drought poses double-barrel questions: how high will it go and how low will it go?

The first “it” are corn and soybean prices. They’ve skyrocketed in the past month and show no signs of slowing down. The second “it” are corn and soybean yields. Unfortunately, the decrease in yield projections show little sign of slowing down, either.

Darrel Good, University of Illinois (U of I) Extension economist, thinks the average U.S. corn yield will be 145 bushels per acre or below. That’s below USDA’s current U.S. average yield projection of 146 bushels per acre. He reported to farmers attending this week’s Top Crop Farmer Workshop at Purdue University.

“The risk is on the downside going forward,” he says. “The question is how much lower the average can go. I think there will continue to be acres that will be abandoned.” A 145-bushel per acre yield average translates into a 12.8 billion bushel crop for 2012.

This year’s projected short crop is impacting corn customers. “There is some concern with the economics of producing ethanol,” says Good. “Unless yields drop substantially from 145 bushels, we should have no issue in meeting the (renewable fuels) mandate. For 2012, the mandate level is 13.2 billion gallons of ethanol.

However, the renewable fuel mandate will continue to increase, going up to 15 billion gallons in 2015. Whether corn production will meet this level and if the federal government will waive the mandate in future short crop years is an unknown.

USDA has also lowered export demand. “There will be lots of competition from wheat and Brazilian corn,” says Good.

Livestock demand will also be impacted, particularly if yield projections continue to drop.

“At some juncture if it drops down to 140 and then 135, it will force the livestock industry to make an adjustment, or perhaps intervention with a partial waiver of the (renewable fuels) mandate for next year,” says Good.That might be on the radar. It’s not a decision, though, that will have to be made anytime soon, at least not before the (2012) crop size is known.”

So where will corn prices go?

In drought years, prices tend to peak earlier than what you might think prior to harvest time. Then prices tend to decline going into winter.

If you have lots of unpriced corn, watch this summer’s yield estimates.

Every five bushels of yield drop packs on another 60 cents per bushel to price, notes Good. So if yield projections drop from 145 to 140 bushels per acre, that will bump up future price levels to $6.85 bushels per acre from $6.25.

Bear in mind that today’s price levels are at the top level of a price plateau that Good and fellow U of I agricultural economist Scott Irwin

Have calculated. Starting about five years ago, they noted corn prices would bob between a low of $3 per bushel up to a high of $6.70 per bushels, with the average being around $4.60.

“What we are seeing now is that high end of the range,” says Good. “When you look at prices between $6.60 and $7, they probably won’t persist at those levels for long periods of time. They can persist for months, but not for years.”

What about soybeans?

Trend yields would have the 2012 U.S. average soybean yield hitting 43.4 bushels per acre. However, USDA has calculated a potential yield of 40.5 bushels per acre for 2012.

This yield shortfall will ensure soybean rationing. “The domestic crush will have to come down,” Good says. “There probably is room for exports to increase just a bit.”

Soybean prices could also take a hit if South American soybean production steps up. “The harvest in 2012 was extremely small,” he says. However, increased South American acreage accompanied by a return to normal yields will increase world soybean supplies.

The key of course, is weather. All bets are off is South America is dry for a second consecutive year.

In the meantime, ending stocks will be extremely tight at 130 million bushels at year’s end. When you compare that level to levels six to seven yeas ago bobbing between 450 and 560 million bushels, it’s easy to see why prices have responded.

“Much like corn, we see a strong seasonal pattern for soybeans, with this market peaking preharvest at higher levels than what we have now,” says Good.

Watch the South American crop.  If it’s good, prices will decline. “Obviously, if the South American crop runs into trouble, price declines may be less or may not occur at all,” says Good. “At this time, though, we see prices peaking early and coming down going into the marketing year.

In their price plateau analysis, Good and Irwin pegged high soybean futures of $17.56 per bushel, low prices at $7.51, and average prices of $10.58 per bushel.

“At some point, we will see $17.50 beans,” says Good. We just don’t know if it will be this year, five years from now, or 10 years from now. But don’t be surprised if we see $8 beans (in future years). Right now, we are in the upper end, and we will be there for the next few months at least.”

When do I price in these next few months?

If anyone knew for sure, they’d be sunning themselves on a Greek island right now.

“None of us knows how this weather will evolve,” says Chris Hurt, Purdue University Extension agricultural economist. “We are in that (high-price) window. I am not a big fan of picking the top. Just try and do some averaging during this window. If you have old crop left or are unpriced on new crop, you will be in the window the next 10 weeks for some averaging. You may not get the high, but you will get an awfully high average.”

Being at the top end of this price window may tempt you do price some 2013 and 2014 crops. “Use caution,” says Hurt. “It’s tough do when you don’t know what yields will do.”



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