What Happened to $4 Corn?

Expanding use of corn for ethanol production along with strong exports and other uses resulted in a rapid tightening of corn supplies and much higher prices. January USDA estimates of 2006-07 corn carryover plunged to only 752 million bushels compared with year earlier estimates of more than two billion bushels for the 2005-06 crop. The low January carryover estimate was followed by limit up price moves that continued a price rally toward an unusual February high near $4.50 for May 2007 futures prices (old crop) and near $4.30 for the December (new crop) contract. To put these prices in perspective, nearby futures prices of more than $4.00 occurred only one other time, during 1996 when the market soared to the record high of $5.54 1/2.

The $4.00 plus corn prices created considerable excitement throughout the winter. There was talk of corn prices challenging the record highs, "new price plateaus," huge profit opportunities, more acres of corn, increasing cash rents and higher land prices. However, after peaking in late February, corn prices began to slip. Limit down moves occurred following the USDA’s Prospective Planting report. By April 3, May corn futures prices had declined about $1.00 per bushel from the February highs and December futures prices were down about sixty cents. Although prices have attempted to rally somewhat based on worries about planting delays, price action remains disappointing. What happened to take away $4.00 plus corn prices?

Old crop corn supplies may not be as tight as earlier estimated. The USDA’s April supply/demand estimates suggest livestock producers have reacted to high feed prices with a 125 million bushels decrease from previous estimates of corn feed use. This translates into an increase in projected 2006-07 ending stocks from 752 million bushels to 877 million bushels. Increases in ending stocks tend to be negative to prices, regardless of the level of carryover, and the current estimate suggests old crop supplies will be adequate.

World corn supplies are also tight and have contributed to strong export demand. Most analysts expect USDA’s export projection of 2.250 billion bushels will be met. But export competition is picking up. There are rumors that China might export some corn. Corn production in Brazil and Argentina is increased and will add to exportable supplies. This suggests that US export projections will not increase and raises the slight possibility that they might come up somewhat short of expectations.

The market was successful in attracting acres for the 2007 corn crop. The USDA’s Prospective Plantings Report indicated that producers intend a 12.2 million acres increase in corn acreage totaling 90.5 million acres. This was more than most expected and would be the largest corn acreage in 63 years! Soil moisture conditions are much better than they were at this time last year. Although wet soils are causing some planting delays, most believe that there is still time to get the crop planted. Since drought is the most likely cause of reduced production, adequate soil moisture is considered to be a positive production factor. For now, the large acreage and favorable moisture conditions suggest trendline or higher yield potential. This would provide adequate production to meet anticipated increases in ethanol use, as well as other expected corn demand needs, and higher prices are not needed to ration use or attract more acres.

Fund liquidation and negative technical market signals point to lower prices. In recent weeks, large speculative fund traders have liquidated a portion of their long futures positions, which contributed to price weakness. These large speculative funds, along with large index funds, still hold sizeable long positions in the corn futures market and further liquidation would increase downside price momentum. Many of these fund traders and other speculators rely heavily on technical market indicators (price chart signals). The price decline in May corn futures prices resulted in a 50% retracement (a common technical objective) of the price uptrend that began last September. Down trending prices and penetration of technical price support levels are some of the other technical signals to sell that could result in additional speculative selling, depressing prices further.

A number of factors could still push corn prices back above $4.00 - maybe well above $4.00. The projected planted acreage of 90.5 million acres is huge and market analysts, using trend yields, are estimating total 2007 production of approximately 12.3 billion to 12.5 billion bushels. But demand is also strong with several projections of total use for 2007-08 that are about 12.3 billion to 12.4 billion bushels. It appears that, even with a huge planted acreage, use will likely nearly equal production, which leaves very little to add to 2007-08 carryover supplies. This tight supply/demand balance provides the potential for a very volatile market situation where small changes in expected production or use could produce large price moves.

Cool, wet weather has delayed the start of corn planting. The April 16 USDA Crop Progress Report indicated that only 4% of the 2007 corn crop had been planted, which trails the 5-year average of 9% planted at this time of year. Some of the early planted corn that was damaged by the "Easter freeze" will have to be replanted. This replanting, along with any planting of corn on freeze damaged wheat acres, is complicated by tight seed supplies and potentially lower yielding varieties. As planting conditions improve, corn planting is expected to catch up quickly. But some worry that the late start is already pushing pollination back into what is usually a hotter and drier period of the summer. If planting does not catch up by early May, corn prices are likely to begin moving sharply higher.

Summer weather will also keep the market on edge. Although favorable soil moisture conditions exist now and if expected acres are planted, summer weather remains critical to achieving trend line or higher yields. Changing growing conditions or even just changing weather forecasts may result in sharp price movements up or down until the pollination is complete and the market becomes more comfortable with production potential.

The longer term outlook for corn prices remains positive. Strong corn demand with increased quantities needed to meet expansion of ethanol production should keep carryover supplies low and support prices at levels above those of recent years. The grain markets will again have to bid for acres in 2008 to meet increasing demand needs. Although prices have declined from the February highs, a return to $4.00 plus prices remains a strong possibility, especially with any production concerns. A volatile market is likely to provide additional opportunities to add to pre-harvest corn sales. But recent price action suggests that prices could also be significantly less than $4.00 at harvest time. If most intended acres get planted and trendline yields are produced, new crop supplies will be large. This creates the potential for a storage crunch at harvest time with a weak basis along with lower futures prices. These possibilities for lower prices should be recognized and used to develop marketing strategies that avoid selling during downward price corrections or making cash sales when basis is likely to be weak.

What about Soybeans and Wheat?

The "Easter freeze" is having a significant impact on winter wheat production. Agronomists and the markets are still trying to assess the extent of damage.Early estimates of up to 100% losses in Southern Missouri and parts of Kansas are common with serious damage in other areas of these states and other surrounding states. Yields are expected to be reduced and it seems likely that a significant number of acres will be destroyed and planted to other crops. However, due to wet weather delays, many producers are first concentrating on getting other crops planted and allowing more time to assess actual wheat damages. But, depending upon the amount of fertilizer and chemicals applied, some of the damaged wheat acres will probably be planted to corn or soybeans. Further weather delays would suggest more of the acres will find their way to soybeans.

Many producers had forward contracted sizeable percentages of their expected wheat production. Apparently some have been able to cancel the contracts or roll them forward into 2008. This situation also demonstrates the value of crop insurance as a part of a risk management strategy, especially for those faced with buying out of contract for wheat delivery. Another alternative would be to use a call option strategy to offset losses if wheat prices continue to increase. For those with minimum wheat freeze damage, the counter-seasonal price rally based on crop damage provides an excellent opportunity to add to sales.

Soybean supply/demand fundamentals and negative chart patterns paint a discouraging picture for soybean prices. The USDA’s April soybean supply/demand estimates cut old crop use expectations and increased 2006-07 ending stocks to 615 million bushels, which adds to record carryover levels. Coupled with this negative market impact of record domestic soybean ending stocks is the harvest of large crops in Brazil and Argentina that also build on record world carryover levels. In addition, planting delays for corn and destroyed wheat acres may result in more soybean acres than producer planting intentions indicated. Chart uptrends and technical price support levels have been broken. These and other negative technical signals, along with potential liquidation of sizeable long position by speculative and index funds, suggest significant downside price risk.

A weakening dollar and any developing weather patterns that seriously threaten soybean production appear to be about the only factors that currently offer chances for soybean price rallies. Longer term with fewer soybean acres in 2007, strong demand, the potential for less burdensome carryovers and the need to bid for acres in 2008 are among the fundamental factors that would provide support to soybean prices. However, given the current negative fundamental factors and discouraging technical signals, any price rallies should be considered as opportunities to add to sales.