The days of planting a corn crop, applying one chemical, harvesting it and then taking it to the grain elevator and expecting a profit are probably over.
Considering current prices and market conditions, making a profit will take effort, agree Extension economists Max Runge and Nathan Smith, speaking at the recent Alabama Corn/Wheat Short Course held in Shorter.
“The price outlook for corn is not so great,” says Auburn University’s Runge. “If we look out to 2015 and 2016, the markets are telling us that there won’t be a lot of movement in price. But keep in mind, a lot could happen between now and then.”
Weather, politics and a lot of other things can and will change in the next two years, he said.
“Our improved yields, technology and management, and we’ve got better irrigation and precision agriculture practices. Our yields will continue to increase, but the demand is out there. However, it has to be at the right price. Lower prices are expected to spur demand for ethanol, so that’ll help with prices. Hopefully, we’re looking at close to the floor with some of these prices now,” Runge said.
Higher prices in recent years have resulted in more corn acres throughout the world. “China was the No. 2 exporter in the world 10 years ago. And now they’re the No. 5 importer of corn, going from a competitor to a customer, so changes such as this are impacting the market," he said.
U.S. corn acres and yields continue to increase, he says. “We’ve also got more corn being planting in non-traditional areas, such as in some parts of the Midwest where cattle formerly were grazed. Our yields are becoming more consistent because of improved genetics and cultural practices such as irrigation.”
This past year, the average corn yield in Alabama was 150 bushels. “I can remember a time when the average state yield was half that number. Our yields are going up, and that’s a good thing. Our five-year average on corn is 117 bushels per acre," Runge said.
There’s an increasing demand for food and food products as the world population increases, he says. “But probably more important is that the middle class is increasing, and it’ll triple before 2050. Demand and consumption of grain continues to climb.”
A few corn marketing tips and ideas for 2014
While there has been a growth in corn demand, the growth largely has come from fuels in the form of ethanol, says Smith with the University of Georgia.
“But that demand has leveled off. Demand needs to grow in other areas moving forward if we want to keep corn prices up. With the big crop we’ve got this year – nearly 14 billion bushels – it’s weighing heavily on the market. Next year, if we’re back on the trendline and even with a cutback in acres, we’ll be back to 14 billion bushels, and we’re using a little over 13 billion bushels,” Smith said.
The threat of lower prices means it’s even more important for corn producers to have marketing plan. “You need to have a plan for getting the best price for your crop and to reach profitability. You need to know what your costs are so you can pull the trigger when the market does offer an opportunity to recover your costs," Smith said.
A marketing plan is an important tool for growers, he says, but don’t expect too much from it.
“No marketing plan is going to work out exactly as you write it, but it’ll give you a starting point to keep yourself on task every year and plan for success throughout the year. It also gives you structure and discipline for making marketing decisions.”
The first step in a marketing plan is to at least cover your variable costs, says Smith.
“You want to at least cover your variable costs, and usually we’re putting this in the terms by which the crop is sold. Breakeven cost is total cost divided by production or by acreage. Let’s say $150,000 for 30,000 bushels means you need $5 to break even.”
It’s also important, he says, to evaluate the market – the situation and outlook.
“What is the basis or the local price? Also, the futures market has proven to be the best source for the market’s perception – all of the information we know at any given moment, including weather, supply and demand estimates, exports and imports, and what’s going on in the economy as a whole.”
Futures, along with the basis, can be helpful in making marketing decisions, says Smith.
“The futures price represents the largest portion of your risk. The basis generally is less risky with not as much variation," he said.
Growers must also consider the availability of storage and the entire transportation situation, says Smith. “In the winter months in the South, we’re grain-deficit. In Georgia, we bring in five times as much grain as we produce. So when things happen concerning transportation, the basis might come up.”
There will be seasonal trends in basis just as with prices, he says. “We’ve had improved basis for corn for the past year in Georgia. You can use the basis to help you make decisions. When the basis is strong, it’s telling you that they want your corn. When it’s weak, you probably want to look at futures or options first and go ahead and lock in the cash. And, it’ll help you time your sales.”
In addition, says Smith, there are cash seasonals and futures contract seasonals. Cash seasonals are based on plant physiological conditions, and contract seasonals are tied to cash markets and events.
“When you look at the seasonal index for corn, typically the April-May period has been the seasonal high. Once we know what the crop is – at the end of June, early – we generally see prices go down. More recently, however, demand outgrew supply in 2007 and in 2008, and in 2010-2011, and then in 2012, we had a big drought. So three years in a row – 2010, 2011 and 2012 – production fell below consumption, and that reflected an abnormal seasonal pattern where prices were better at harvest than in previous years. We may be moving back into a more typical seasonal pattern on prices.”
The fundamentals are important whenever you’re looking at seasonals, says Smith. “We’re coming off of a large crop, so we’ve got an outlook of lower prices. Studies show that if you time your sales during those seasonal time periods, you might get 3 to 10 percent better on your cash price. Even though you don’t want to sell your entire crop, you might want to take advantage of those seasonal times of the year.”
The corn market has been in a downward trend in prices since reaching a high at around the end of June, says Smith.
“I think we might trend sideways for awhile. The long-term trend shows resistance in support levels, and that’s probably where we’ll be if we have another large crop. This is not to say that we might not go to $5, and we might touch $3, but that’s the range right now.”
A savvy marketer knows his costs, he’s forward-looking, and he has a good handle of what’s going on with supply/demand, says Smith. He also looks for extra sources of information.
“There’s still opportunity out there,” he says.