Large Carryovers = Lower Prices

USDA’s January 12, 2005 reports included final 2004 corn and soybean production, along with a couple of small adjustments to projected use. The projections generally contribute to a bearish outlook for corn and soybean prices.

Record corn production of 11.807 billion bushels resulted from record average yields
of 160.4 bpa. This surpasses the previous record yield, set only a year earlier, by an amazing 18 bpa! Domestic corn use, led by increased feed consumption and ethanol production, is anticipated to be 8.870 billion bushels. Although USDA lowered corn export projections by 50 million bushels, exports of 1.950 billion bushels would be an increase over the previous year’s 1.897 billion bushels. The combined expectations for domestic use and exports result in record projected total use of 10.820 billion bushels. In spite of these record use estimates, ending corn stocks are expected to almost double from last year’s 958 million bushels to 1.959 billion bushels. If realized, this would be the largest corn ending stocks in more than 10 years!

Most analysts have only minor reservations with USDA’s domestic corn use projections, but exports remain a major concern. Although world corn carryover is expected to increase, the increase is largely due to the large U.S. supplies. USDA projects foreign corn ending stocks to show a small decline and, while increased, total world carryover is relatively modest compared to historical levels. However, increases in other coarse grains and poor-quality wheat supplies are providing competition for corn. Chinese production appears to be better than expected and they may provide additional corn export competition. Production conditions have been favorable in Argentina and it appears they will have a large crop. These, along with instances of weaker foreign demand potential, are among the reasons why corn exports have been disappointing and may lead to further reductions in USDA’s corn export estimates. Some analysts believe the possibility of reduced exports could push United States ending corn stocks above 2 billion bushels.

Increasing ending stocks point to lower corn prices. USDA projects corn prices to decline more than 45¢ per bushel from last year to a range of $1.80 to $2.10. In spite of increasing ending stocks estimates, USDA did raise the lower end of the expected price range from the December projection of $1.70 to $2.10. This does not suggest stronger prices ahead, but does reflect higher prices for early producer cash sales made before prices declined to current levels.

These supply and demand factors create a difficult marketing outlook for those with unpriced corn in storage. The LDP provides some downside price protection at current prices. However, the LDP has already been claimed on about 2/3 of the corn crop. While producers have been reluctant sellers, this suggests that without the protection of the LDP, panic selling could occur if prices continue to decline. Weaker than average basis in some areas and market carry in the July 2005 corn futures contracts suggest the possibly of some storage returns. Although the market offers limited storage return signals, these returns are not assured unless they are hedged. It is important to understand that lower prices could erase the carry and increased cash corn movement could lead to weaker basis. Adding to the price risk is expectations that U.S. corn acreage will increase in 2005 and add to an already abundant supply situation.

The large corn supplies, concerns about the level of exports, and increasing ending stocks contribute to a negative price outlook in the months ahead. Longer term, while corn acreage is expected to increase, most realize it would be very unusual to have a third consecutive year of record production in 2005. Domestic demand is strong, low prices should encourage additional use, relatively tight world supplies, and any production problems could tighten corn supplies and result in higher prices. If 2005 corn acreage dos not increase significantly and trendline or lower yields occur, the corn outlook could change to one of decreasing supply and higher prices. However, old crop pricing opportunities are likely to be limited to small seasonal rallies and, if the LDP has already been claimed, storing corn carries significant downside price risk and added storage costs.

The soybean supply situation may be more discouraging than the large corn supplies. USDA’s final soybean production estimate of 3.141 billion bushels was slightly lower than the previous estimate, but still a new production record. Average soybean yields of 42.5 bpa exceeded the 10-year old record of 41.4 bpa. While total soybean demand is expected to be strong at 2.823 billion bushels, it will not be record use. Adding to demand concerns is the fact that, although export demand (led by Chinese imports) has been strong, most analysts expect export demand to shift to South America as their harvest approaches. Domestic soybean ending stocks are expected to nearly quadruple from last year’s 112 million bushels to 435 million bushels. This represents an increase from the smallest soybean ending stocks in 27 years to the largest projected ending stocks in 19 years, a huge increase!

World soybean supplies are also burdensome. Although there have been some spotty dry weather concerns in Brazil, timely rains have kept growing conditions reasonably good and conditions in Argentina have generally been favorable. Some concerns about rust are being noted, but damage appears limited for now. If favorable production conditions continue, USDA expects world soybean ending stocks to soar to record highs. Burdensome domestic soybean supplies coupled with expected record world carryover paint a discouraging picture for soybean prices.

USDA’s projected 2004-05 soybean price range is $4.75 to $5.45. It has been somewhat surprising to some analysts that soybean prices have held up as well as they have in the face of large supplies throughout the fall and into early winter. Last year’s tight supplies resulted in a soybean "pipeline" that was nearly empty and pent up crush demand. These factors, along with slow cash soybean movement, have supported prices. However, as crush needs are met, exports shift to South America, and producer cash sales increase, higher pricing opportunities may be limited.

Although the supply news is negative for prices, considerable risk and uncertainty exists for soybean production and prices. South American production appears to be good, but there is still time for rust or late season weather problems to impact production. The potential of soybean rust in the United States adds to uncertainty with a variety of unanswered questions, such as: Will a major outbreak of rust occur? Will soybean planted acres be reduced? Although supplies of fungicide may be adequate, is enough spray equipment available to apply fungicides timely? In addition to rust, growing season weather also is an unknown at this time. These uncertainties create the possibility of some price volatility until 2005 production expectations become clearer. However, large domestic and world soybean supplies suggest the price direction for soybeans is most likely to be down.

Marketing the 2005-06 corn and soybean crops also will offer challenges. The currently expected large carryovers translate in to large beginning stocks for the next crop. With large production, supplies could continue to grow and further depress prices. However, disease, weather uncertainties, and lower price stimulated demand increases could offer, at least limited pricing opportunities. These opportunities, coupled with government support programs (CCP, LDP, etc.) and crop insurance, may enable capturing net prices that protect farm profitability. The March 31 USDA Prospective Plantings Report will be watched closely for the first clues of 2005 production potentials. New crop marketing plans to avoid price lows, capture any pricing opportunities, and maintain flexibility in face of uncertainty should be formulated now.

Plant Corn or Soybeans in 2005?

The discovery of Asian soybean rust as far north as the Missouri boot heel raises concerns about the risks and costs of producing soybeans. Some have suggested that many producers will shift acres from soybeans to corn, citing the potential added fungicide costs and recent history of poor soybean returns relative to corn. While for some states this may be true, historically Missouri is competitive in soybean production and soybean returns often exceed corn returns in many parts of the state.

The decision whether to shift from corn to soybeans is not clear cut and should be budgeted carefully. Although fungicides will add to soybean production cost, corn production costs also are expected to increase in 2005 due to higher fuel, fertilizer, and other input cost increases. Missouri 2005 crop budgets and an analysis, Asian Soybean Rust: Plant Corn Instead?, can be found at the University of Missouri Food and Agriculture Policy Research Institute website: www. fapri.missouri.edu (click on Farmer’s Corner, then select Annual Crops under Printed Budgets, and then choose the appropriate analysis or a crop budget). The corn and soybean budgets suggest a typical soybean advantage of $37.74 over corn in north, central and southwest Missouri. Assuming a single $20 per acre fungicide application, along with application costs, soybeans still retain a $15.39 per acre advantage over corn. With two fungicide applications the decision becomes less clear, suggesting a ­$6.96 margin for soybeans compared to corn. The results are somewhat different for the southeast Missouri crop comparisons. It is important to note that these are "typical" examples. Actual production costs and returns vary considerably from farm to farm and across the state, so it is important to budget carefully. It also may be important to review crop insurance protection to choose the best alternative to protect against production/income losses. Note: the Risk Management Agency requires that producers must follow recommended control measures in order to be eligible for crop insurance indemnity payments.

Soybean rust and acreage shifts also may impact prices. A major acreage shift to corn could increase 2005 corn production. Increased corn production would add to corn supplies, potentially resulting in even lower corn prices. While soybean supplies remain large, reduced soybean production could tighten supplies somewhat and lead to possibly stronger soybean prices. Soybean rust is more than a production problem; it is also a marketing and financial management concern.