Corn profit opportunities look good in 2012

Corn profit opportunities look good in 2012

• This coming year may not be as good as this past year, but corn prices still should be pretty good.” • There’s an opportunity, at 120 bushels, to see a little profit on corn.”  

The cure for high prices is high prices, and the cure for low prices is low prices.

The problem with this rule of economics is that prices usually stay lower for longer periods of time than they stay higher, says Max Runge, Auburn University Extension economist.

“We’ve had some lower prices this past year,” says Runge. “This coming year may not be as good as this past year, but I think prices still will be pretty good.”

Runge presented the market outlook at the recent Central Alabama Corn Production Meeting held in Autaugaville.

U.S. corn and soybean production was the smallest this past year than it has been in three years, he says. “Our wheat crop was the smallest in five years. We don’t know yet if that is good or bad news. Foreign production hit a record high, so that’s hurting our export markets a little. Some of the indications are that 2012 corn acreage is going to be up, and there are some other factors impacting the market.”

The underlying factor may be weather, says Runge, and this past year it depended upon where you were located. Southeast Alabama was almost a total disaster, the Tennessee Valley was good, and west Alabama was mixed, he says.

“The drought outlook from December 2011 to February 2012, shows the drought will persist or intensify in the Southeast. Weather forecasts are not always accurate, but if they are right, we need to be aware of the possibility.”

As of now, for some areas of Alabama to get back to normal moisture levels, about 30 inches of rain would be needed or 120 to 125 percent of normal amounts, says Runge.

“Most of the mama cows in the United States are in Texas and Oklahoma, and since they’ve had such a severe drought, they’ve had to get rid of some of those cows. A lot of the corn in the U.S. goes to feed cattle, but there are fewer cattle out there. Most of our corn doesn’t necessarily go to feed cattle, but it goes to feed chickens. There will be some lingering effects to the drought” he says.

In Alabama, the eastern region and the southeastern corner were hit hardest by drought. In Georgia, the southwest quadrant, where most of the agriculture is located, was affected.

Consumption has increased

Corn consumption, from 1995 through 2011, has increased, says Runge. “Exports have stayed fairly steady. Food, seed and industrial uses of corn, including ethanol, has increased markedly. Not that long ago, 5 percent of U.S. corn production was going to ethanol. Now, we’re up to almost 40 percent going to ethanol production. Is that good or bad? It depends on whether you’re buying or selling corn. If you’re growing and selling corn, it’s probably not that bad. If you’re trying to buy corn to feed, it’s not good.”

Unless something changes, he adds, this situation will remain. “Ethanol usage was supposed to be 12 billion gallons back in 2010, up to about 14.5 billion by 2015, and then 15 billion starting in 2016, and that’s only five years away.”

Back in 2002-2001, says Runge, China was exporting a lot of corn. But in the last three years, they’re importing a lot more corn. They can provide a lot more jobs, especially in their textile spinning mills, if they plant cotton, he says.

Corn world ending stocks continue to fall, he says, due to weather problems and demand.

“In the commodity markets, the rules changed,” says Runge. “Up until about 1999, the market was limited and not everyone could get in. The hedge funds and the Wall Street money couldn’t get in up until that time. In 1999, the rules changed, and there were new investors who wanted a return on their money.

“Now, there’s quite a bit of Wall Street money in the commodity markets, and it makes it more difficult to say what we think prices might be. But thankfully, supply and demand does still have something to do with it.”

Looking at commodity prices from a year ago, corn hasn’t changed much, he says. Soybeans were about $1 higher, and cotton was about 14 cents higher a year ago.

“But input costs are going up. Nitrogen, phosphorus and potassium all will be going up. The good news is that we’re not as bad off as at the end of 2008. That’s when commodities ran up and inputs went up along with them.”

Runge advises growers to look at and price nitrogen. About 55 percent of our nitrogen is imported and 81 percent of potash comes from overseas, he says. The U.S. has about 90 percent of the world’s supply of phosphate, exporting 44 percent.

“The good news is that chemicals haven’t gone up too much and are holding fairly steady. Seed prices will be up some this year, and peanut seed is expected to be up quite a bit.”

Growers can expect that loan requests will be more thoroughly analyzed this year, says Runge.
Bankers possibly will be requesting more information.

Machinery forecast

Turning to the ag machinery forecast for 2011, combines will be up about 7 percent, cotton pickers up 9 percent and 150-horsepower tractors will be up about 8 percent, he says. Starting in 2012, there will be new emissions requirements, so those prices might increase even more.

Oil was about $70 per barrel about a year ago, and now we’re in the $100-per barrel range, says Runge. It seems to be somewhat steady, but volatility will remain in the oil market, he says.

Crop insurance should be down some this year, he says, but land rent probably will be up. ‘

“If you’re looking at expanding, you probably need to run the numbers and do a lot of ‘what ifs.’ There are pros and cons to long-term contracts. In Huntsville, the airport owns about 3,000 acres of row-crop land. They put it out for sealed bids, in a 10-year contract. They’ve got new contracts coming out this spring, and the rent on that land — for dryland acreage — amounted to just over $200 per acre. That’s a lot of money for dryland acres. But a lot can happen in 10 years. In seven or eight years, land rent could be $250. So do due diligence on land rent.”

The U.S. dollar is the highest it has been in 11 months, but that’s hurting our exports, say Runge, and the European debt crisis continues to weigh heavy on the U.S. economy.

“Looking at marketing strategies, you can go with one-third, one-third and one-third, before or at planting, during the growing season, and at harvest. Another strategy is not to plant anything you haven’t priced, so price it early and then plant to that. The easiest thing to do is to price it at harvest as you unload it from the truck.”

This past year, marketing on corn was flat throughout harvest, so it didn’t really matter when you marketed, he says. By September 2011, it was on a steady increase.

“You would have been in pretty good shape if you have sold some at planting, some during the growing season, and some at harvest. I don’t think prices this year will get much lower than where they are now.”

At 120-bushel corn, the break-even cost is about $4 per bushel, on irrigated cropland, says Runge. “There’s an opportunity, at 120 bushels, to see a little profit on corn.”

Crop rotation is very important, he says, and it is even more important now.

“There’s isn’t a big problem yet with herbicide-resistant weeds in parts of Alabama, but it’s coming. The Tennessee Valley has it, southeast Alabama has it, and it’ll be moving in. Rotation will help, so you can change the chemistries with the crops you’re planting.”

It’s important, says Runge, to manage fertility, especially considering the high nitrogen prices. “If you can price some inputs early, I wouldn’t hesitate to do so. But I wouldn’t be in a big hurry to price crops because I think they’ll be some opportunities later on.”

If you’re a farmer and you had a good year, it may be an ideal time to invest back into the farm, he says.

“This could include technology for your farm; water, whether it’s with an irrigation system or new water sources; or you could pay down some of your higher interest debts.”

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