| April 18, 2008 | Archived Issues |
Will There Be Enough Corn?
Throughout the winter, much of the market discussion centered on the markets "bidding for acres." Domestic and world wheat supplies were low with disappointing winter wheat seedings, so more acres of spring wheat were needed. Strong soybean demand and last year’s sharp drop in soybean acreage resulted in low soybean ending stocks estimates. Increased corn acreage had produced a record corn crop in 2007, but strong use was consuming that production. This produced a situation where more soybean and wheat production, or more acres, was needed in 2008. But, corn supplies also needed to be maintained. The needs to assure supplies adequately meet expected use and encourage increased 2008 production were among the factors sending prices higher. First wheat and then soybean prices reached new record highs. Corn prices followed and eventually they also reached record highs, but maybe not soon enough to capture acres.
It appears that soybeans won the bid!. The USDA’s Prospective Plantings report, showing producer intentions for 2008 as of early March, indicated a six percent increase in wheat acreage. Last year’s 60.4 million acres climbed to 63.8 million acres. But soybeans are the big winner with an eighteen percent increase from 63.6 million acres to 74.8 million acres. Corn appeared to be the loser, shrinking eight percent from last year’s 93.6 million acres to a surprisingly low 86.0 million acres.
Following the report, new crop corn prices have surged above six dollars in an effort to encourage more acres back to corn. This could occur and increases in planting acreage compared to early March intentions often does occur. But wet weather conditions are raising concerns about planting delays, lower yields and whether even planned acres will be planted. If delays continue and only 86 million acres are planted, will there be enough corn to meet demand needs?
The current year’s corn use is expected to be a record. Feed, industrial, export and other uses are expected to total 13.110 billion bushels, according to the USDA’s April 2008 supply/demand estimates. This is slightly more than the 13.074 billion bushels produced from last year’s huge planted acreage. The corn carryover for 2007-08, which was earlier estimated at nearly two billion bushels, has now shrunk to an estimated 1.283 billion bushels. Is this enough carryover to make up for the reduction in acres?
Strong corn demand is also expected to continue. Livestock producers have been squeezed by high feed costs resulting from the high corn prices. Some large poultry producers have already announced production cuts. Farrowing intentions, from the USDA’s Hogs & Pigs report, suggests that July-August 2008 farrowings will only be 98 percent of last year. But livestock numbers remain high and, while 2008- 09 feed use may be somewhat lower, feed use will likely account for more than five billion bushels of new crop corn. Although construction of new plants has slowed, ethanol use of corn is still expected to approach four billion bushels in the upcoming crop year. While the popular press has suggested ethanol use is "burning food" and taking food away from foreign countries, the current corn export estimates do not suggest that this is occurring. Current year corn exports are projected at a record 2.5 billion bushels! This occurred in spite of the fact that ocean freight rates have soared due to higher fuel costs. Tight world feed and food grain supplies, along with curbs on rice exports in some Asian countries and limits on wheat exports in other countries, suggests world demand for US grain (including corn) exports will continue.
So, what’s the bottom line? At this point, it is hard to determine where any major cuts in corn use could come from! This means that very good yields or more corn acres are needed to insure that demand needs are met.
Should producers change plans and plant more corn? Although corn prices are near record highs, this is not an easy question to answer. It depends upon a variety of production, marketing and financial risk factors.
Current new crop corn prices suggest that corn should be more profitable than soybean production. But, using current crop prices and current production cost estimates, either crop appears profitable for Missouri producers. Cool and wet weather conditions have delayed field work, which may result in lower corn yields due to late planting if conditions do not improve quickly. Production inputs are expensive, especially for corn which requires more fertilizer and fuel than soybean production. Individual farm yield risk and how soon the crop can be planted will be important considerations for making any changes. Lower yields and high production costs could quickly “eat up” the advantage for corn. However, recognize that if the large increase in soybean acres is realized and soybean stocks are rebuilt, lower soybean prices may also trim soybean profit potential.
The Crop Budget Generator, available at the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri (MU) website, is a budgeting spreadsheet useful for comparing current estimates of costs and returns for corn or soybean production. To use the FAPRI-MU tools, go to: http://fapri.missouri.edu/farmers_corner/tools/index.asp?current_page=farmers_corner
Market risks are significant in the corn market. Although corn prices are near record levels, tight acreage and supply conditions result in a volatile market. Any additional weather problems could produce explosive results. In contrast, improved weather conditions and more actual planted acres than planned could quickly remove some of the "risk premium" from corn prices. Other factors, such as any changes in corn use, fund buying/selling in the futures markets, the general economy, domestic or foreign government policy changes, etc., could result in stronger or weaker prices.
Protecting price risk is also more difficult, since some elevators are not offering cash contracts for new crop deliveries. If it is possible to find a buyer that offers new crop contracts, then additional transportation costs and travel time at harvest may be necessary. The other growing season selling possibilities are to use futures hedges or option strategies to protect prices, but this also shifts more of the risk management burden to the producer.
Added financial risk for corn production occurs with the increased production input costs, along with the cash needs associated with using futures or options to manage price risk. These result in increased cash flow needs and the likely need to arrange for additional credit to cover the added input costs, option premiums or futures market margin requirements.
Added financial risk for corn production occurs with the increased production input costs, along with the cash needs associated with using futures or options to manage price risk. These result in increased cash flow needs and the likely need to arrange for additional credit to cover the added input costs, option premiums or futures market margin requirements.
A lot is riding on how much corn will be produced.Worries about whether there will be enough corn have sent prices to record levels. It is critically important to produce enough corn to meet demand needs. The cut in acreage, indicated by the producer intended corn plantings, suggests that corn supplies may grow very tight. There is no room for any crop problems and many market observers would like to see another four to five million acres planted to corn.
This is creating a significant profit opportunity for corn production. But, it is a high stakes game! Operating costs have skyrocketed. Production, marketing and financial risks are significant. If the decision is made to plant more corn, managing these risks is essential.