“We have this interesting phenomenon where we’re building stocks in the U.S. and in the world of corn, soybeans, wheat and cotton,” says Todd Davis, University of Kentucky Extension economist. “It’s really unfortunate. They say the cure to high prices is high prices, and we’ve seen that. We’ve stimulated a lot of production worldwide, and it has come home to roost.”
Davis presented the corn market outlook at the recent Southern Region Outlook Conference held in Atlanta.
There’s a bumper crop of corn headed our way, he warns. “In 2010, the corn market outlook was a lot more fun, but the bears have killed the bull.”
On Jan. 10 of this year, when the World Agricultural Supply and Demand Estimate (WASDE) was released, the December 2014 world contracts were at $4.58, and that was a little surprising, says Davis.
“It was a little bit of bull market. We were tight on soybeans and had to bid for acres, so there was a little run-up to $4.72. Then at the end of March, contracts closed at almost $5. Then, on April 10, it started working its way lower. May 15 is significant in Iowa because that’s usually the cut-off date for planting corn, and it closed at $4.81. Since then, it has been in a decline. It was $4.25 with the June acreage report, $3.69 with the August WASDE report, and $3.41 with the September WASDE,” he says.
There’s a lot of fear in the market, says Davis, and any risk premium that has been built up over time is getting worked out.
“If you want to think cynically about it, we’ve benefited from some production problems. The 2012 crop was mature very early, but this year is about like last year – about 12 percent behind average.”
The highlight of planted corn acres would have been in 2012 with 97 million acres, says Davis.
“We actually reduced plantings this year to 91.6. Harvested acres are at 83.8 million, and there’s some debate over how many of those acres actually got planted. It’s like reading tea leaves because NASS does a survey and FSA is more like a census, for those people in farm programs. But not everyone is in a farm program, so the numbers aren’t always as close as we’d like. It’s conceivable that the planted acres could be closer to 89 than the 91.6, and we’ll see how much of that was harvested.”
As of September, yield projections were at a record 171.7 bushels per acre. “If you look at the rolling 25-year trend, we hit a rough spot where we were at or below trend, we had a good year in 2009, and then we had three consecutive years of below-trend yields. So this yield is welcomed from a market standpoint of having a good yield to rebuild the ending stocks.”
Now, says Davis, there’s a record-large supply of corn. “What was keeping the risk premium in the market was having record-tight beginning stocks for a couple of years. We bought ourselves a little breathing room last year, and now we’re projected to add almost 14.4 billion bushels of corn, so it’ll be a record-large supply.”
Obstacles seen on demand side of ledger
The demand side should be stimulated by current lower prices, he says, but there are some headwinds making growth in this area more difficult, says Davis.
“One headwind is feed. There are a lot of opportunities for cattle feeding, but it takes a lot of time and money to make that adjustment. It takes some really good weather in Texas and Oklahoma to get some pastures to growing some grass. But feed use should expand with smaller animals like chickens and pigs. Feed use will increase. Most of FSI (food, seed and industrial uses) is ethanol. It had a good run but we’re pretty much at the production capacity, so we’re not projecting a substantial increase in ethanol FSI over the previous year.”
The great unknown, says Davis, is going to be exports. It’s projected that exports will decrease by about 200 million bushels over the previous year, but a lot of that is due to more competition in the market, he says.
“The U.S. market share of exports ebbs and flows due to crop size and geopolitics. But even before ethanol, we had more than 50 percent of the world’s exports. When you use more domestically, then you have less to ship abroad, and then you add some production problems. We’re at below 40 percent as far as corn share of world exports. But our friends in South America are helping to supply the world with corn, including Argentina and Brazil.”
Argentina, however, has serious problems, including an inflation rate that is officially around 15 percent officially but closer to 30 percent unofficially, notes Davis. Farmers there will plant soybeans because their credit is constrained, and they’re holding onto inventory, he adds.
Brazil probably will also plant a lot of soybeans, for similar reasons – they have a bad economy along with credit constraints, he says.
“We’ll have plenty of corn for the export market. It just depends on if the buyers will come to us. If you want to think of a country in chauvinistic terms, China is the fair-haired girl that everyone wants to court, and it is seen as a potential market. Japan is the No. 1 destination for corn, followed by Mexico, and China could be another Japan-type market for U.S. corn if things work out.”
The big stumbling block, he says, is China’s policy regarding GMOs.
“In November of 2013, China decided it didn’t want to import any more corn because of the presence of MIR162 trait. A cynic might say they don’t want a lot of imports because that would depress its domestic price and start triggering government payments. This past June, China decided not to import DDGs (distiller dried grains) that have this trait.”
Lawsuits have followed, he says, and another GMO trait was introduced this past spring that also is not being accepted by China.
Eight-dollar corn isn’t good for ethanol processors, but cheap corn brings back returns to the ethanol industry, says Davis.
“Cheap corn is making it very profitable to process ethanol. But we’re pretty much at production capacity, and we’re at the limit for blending. We have an upbeat processing industry, and we don’t have to worry about plants going out of business.”
Looking at stocks-to-use ratio and its relation to price, Davis says U.S. corn producers had three years of very tight stocks, along with corresponding record-high prices. “We’re projected to have stocks-to-use of over 13 percent, with the corresponding nose-dive in price.”
The WASDE in September gave a price range of $3.20 to $3.80 per bushel, with a midpoint of $3.50, down considerably from the farm price of $4.45 from last year, he says.
“Taking the USDA models, plugging in futures prices, and their marketing average price, and running it for next marketing year, the models aimed at the 2014-15 price should be $3.27, and the 2015-16 at $3.69. So for the PLC, that would suggest a payment of 43 cents and then one-cent. This is what the market is pricing corn at, so we’re at the lower range of USDA’s estimate right now for the 2014-15 crop.”
When farmers make decisions under the new Farm Bill, they need to pay attention to what the market is signaling, says Davis.
“When the bill was drafted, $3.70 corn seemed like something we’d never trigger. But it’s here, and it’s reality.”
Profitability for U.S. corn production doesn’t look so great for next year, says Davis. “I think the U.S. will lose corn acres next year, based on budgeted returns, probably somewhere between 1.3 and 3.2 million acres.
“I see a modest increase in use from this current marketing year, so I can see stocks-to-use falling to around 12 percent. I don’t think we’ll give up 3 million acres from this year.
Profitability is going to be a struggle next year, and if there are folks who didn’t do any risk management this year, they could have an uphill climb.”
Turning to grain sorghum, Davis says planted and harvested acres are down from last year. Yield is actually up by seven bushels per acre, but ending stocks – as for the other commodities – are building.
“Corn prices have fallen through the floor, and that should drive sorghum with it, down by about $1 from the previous marketing year.”