Higher Corn Prices in 2007?

Since late August, corn prices have rallied about $1.60 per bushel. Surprisingly, this price rally occurred while the third largest crop in history was being harvested. During the rally corn prices have reached levels exceeded only four times in the last 35 years! This market action has caused USDA to revise price projections for the 2006-07 corn marketing year. In the past two supply/demand reports (November, December) the expected price range was increased by a total of 50 cents. This is a huge change within a short period of time. USDA now forecasts corn prices to average from $2.90 to $3.30.

Missouri cash corn bids are currently near or above the top end of USDA’s projected price range. Bids in northern Missouri are generally well above $3.00 per bushel and some locations in southern Missouri are in the upper $3.00 range. These are very good prices, but will they go higher?

Some analysts believe corn prices will go above $4.00. Prices came close to $4.00 in late November when March ’07 futures prices briefly traded above $3.90. While $4.00 corn may seem possible, it is important to remember that this has occurred only once. That was in 1996 when the market moved to record highs while rationing very tight supplies. While current corn supplies may begin to tighten, supplies are not forecast to be nearly as short as in 1996. Although prices got close to $4.00, the sharp price uptrend has stalled with choppy trading now occurring. March futures have traded in a 35 cent price range for about six weeks. As the holiday season approaches, many analysts now expect the choppy price action to continue into year end. So the question becomes, have we seen the high or will the uptrend resume and corn prices move even higher into the New Year?

The corn market has been driven by strong demand and questions about whether production will be able to keep up with this strong demand. Ethanol demand for corn is expanding rapidly. There are 110 ethanol plants in operation with an additional 71 under construction. USDA estimates ethanol use will consume 2.175 billion bushels of the 2006 corn crop. This use is expected to increase significantly for the 2007 crop, depending upon how quickly the plants under construction can be completed. With world coarse grain ending stocks projected to be the lowest in more than 25 years, export demand for corn is strong. Corn export progress suggests USDA’s 2.200 billion bushels export projection will be met. These demand factors, along with feed and other uses, are expected to lead to total use of 11.790 billion bushels. This total use exceeds the third largest production of 10.740 billion bushels by more than one billion bushels. It will cut carryover levels in half when compared with last year.

While corn supplies are adequate for this year, increased corn production will be needed in 2007 to meet increasing demand. New crop corn futures (December ’07) have offered prices that appear to favor shifting acres from soybean and other crops to corn production. Most early estimates of 2007 corn plantings suggest a range from 83 to 88 million acres, up 5 to 10 million acres from 2006’s planted acreage of 78.6 million acres. The concern is that the lower end of that acreage range or disappointing yields might not provide enough added production to meet increasing demand needs. How high will the market have to bid corn prices to insure adequate production? This suggests considerable market uncertainty for several months, since it will likely be well into the production season next summer before the market can be comfortable with actual planted acreage and the growing conditions necessary to meet needed production. This uncertainty about acreage and production supports the argument for higher corn prices into 2007.

Although the case for higher corn prices appears strong, there are also downside price risks when prices are at historically high levels. If energy prices decline (they have already slipped from the price highs of last summer), high corn prices could reduce ethanol profits and slow expansion. High corn prices, along with any increases in the dollar, increases costs to foreign buyers and encourages foreign production. High prices may also eventually ration foreign use and negatively impact export demand. Livestock producers are already "feeling the pain" of higher feed prices. This will likely lead to shorter feeding periods, lighter finished weights, use of lower-priced feed alternatives to corn, and slowing of demand for corn for feed.

Although higher corn prices in relation to soybeans are needed to attract more acres into corn production, this doesn’t necessarily require corn prices to go higher. Lower soybean prices would accomplish the same thing. The soybean market has broken recent uptrend lines, but current prices are higher than the record carryover levels suggest they should be. As the South American production season begins, favorable weather in that hemisphere may pressure prices in a world with record soybean supply levels. Declining soybean prices could encourage shifting acres to corn in 2007 without having to push corn prices higher.

Another concern by many in the grain trade is what the large trading funds may do. If they decide to take profits or take money out of the grains, due to the large amount of money they control, it could have significant negative impact on prices.

There are also a number of other unexpected events such as bird flu, soybean rust, political unrest, terrorism, oil supply disruptions, etc. that could impact the markets in the months ahead if any of them occurred.

Trying to forecast a market top before it occurs has been described as a "fool’s game!" Without some unexpected bullish news, it appears the corn market may have rallied about as far as it is going until after the holidays. Although a number of market factors suggest prices could go higher (maybe much higher) in the New Year, there are also downside risks. For the bull market rally to continue, prices must take out the highs of late November. Until that happens, there is risk that the uptrend is over and prices could decline. Remember that most of the strong bull markets of the past ended while the majority of people were still expecting higher prices. For now, predicting how high prices will go or when they will peak is a nearly impossible task.

Regardless of whether corn prices do or do not move higher, current prices offer very good returns for most producers. While it is important to be in a position to capture higher prices in 2007, it is also important not to miss out on historically high prices opportunities if the market fails to perform as expected. This means that marketing plans need to include "what if I’m wrong?" strategies.

Market Bulls. For those who expect the price rally to continue and are not selling, it means having plans in place to protect or capture current price levels if they fail to rally above previous highs and start to decline. This can be accomplished with a variety of strategies. A couple of examples are: (1) While planning to follow the uptrend, use downside price targets (stops or trap prices) to trigger sales if the market fails to rally and breaks lower. And (2) use option spread strategies to protect floor prices and target upside price goals.

Market Bears or those at least skeptical of higher prices. For those wanting to make sales and capture profitable prices, it may mean spreading sales or using options in order to be able to capture higher prices that may occur later. Spreading sales captures profits on a portion of the corn and retains some inventory that can be sold during other price rallies. Using option strategies can also provide downside price floor protection and allow capturing higher prices.

Current corn prices, along with good wheat and soybean prices, suggest very good profit potential for crop producers. With the uncertainties about possibilities for even higher prices into 2007, it is essential to be prepared and in a position to take these profits from the market when they are offered.