University of Illinois agricultural economist Darrel Good says there is a relatively high probability of large crops, increasing stocks and lower corn and soybean prices in the new marketing year, possibly warranting some aggressive pricing of 2013 production.
University of Illinois agricultural economist Darrel Good says there is a relatively high probability of large crops, increasing stocks and lower corn and soybean prices in the new marketing year, possibly warranting some aggressive pricing of 2013 production.
BLOOMINGTON, Ill. — The corn price environment likely will remain volatile in the upcoming year as the market transitions from a drought-shortened crop toward a potential large crop.

“What’s supposed to happen in a drought year like 2012 is prices are supposed to go to extremely high levels in order to tell consumers they have to cut back, and then as they do that, prices are supposed to moderate as consumption declines and even more as production rebounds in the following year,” said Darrel Good, University of Illinois agricultural economist.

“So, eventually, prices come back down to where they were before the drought hit. We’re kind of in the middle of that right now, making the transition with the market focusing still a bit on old crop and still a bit on new crop.”

Higher prices led to a reduction in corn exports, including extremely low exports for the first quarter of the current marketing year. There also has been a 10-percent reduction in ethanol production compared to a year ago.

“What we don’t really have a handle on at this juncture is what’s happening with feed consumption of corn, and we won’t really get a reading on that until the December stocks numbers is released on Jan. 11,” Good said.

“Our best hope for probably stemming this price weakness that we’re experiencing right now is to see a bit of a friendly number on Jan. 11. We’ll get both the stocks number, which will reflect the adjustment in the crop size, if any, that the USDA will make from its November forecast.

“That stocks number will catch both how much corn did we feed and how big was the crop really. There is some evidence that we might see some friendly numbers there, but barring that, I think we’re going to continue to see prices make that transition back towards pre-drought levels, and the question in front of us now is just how fast that happens.”

Beyond the upcoming stocks and final production reports is the South American factory. Argentina had a very small corn crop last year due to drought conditions similar to that experienced in the U.S., and current projections indicate that country’s production will reach record levels in 2012.

“The USDA is currently projecting something just under 1.1 billion bushels. It’s not a large crop, but most of that is available for the export market, so it becomes very important,” Good said.

“Argentina started a little wet, and there were some concerns about perhaps not all the acreage getting planted, but for the most part, I think they are on track for a very large corn harvest in 2013.”

Of course, the 800-pound gorilla in the marketing world is what happens during this year’s growing season in the U.S. U.S. corn yields were 40 bushels below trend in 2012, and Good is penciling in a return to trend yield for 2013 based on a couple of factors.

“One is, when we look at previous droughts for the last 50 years, we see in each of those cases we have found a full recovery in yields in the following year, so there is some precedent for thinking we can do that again in 2012,” he said.

“Obviously, there’s a far amount of concern about the ongoing dryness that we’re experiencing right now, particularly in the Plain states and creeping into the western Corn Belt, and that will be problematic if that persists into spring and the early part of the growing season.

“So it is a reason for the concern, but on the other hand, we have plenty of time for recharging the soil moisture, and then rainfall during the growing season becomes the most important yield factor. A lot of people are going to fuss with the idea of penciling in a trend yield for 2013, but that’s my expectation at this point.”

A return to trend yield creates three implications going forward.

“One is production will be extremely large in 2013 unless we change acreage fairly substantial from what we planted this year,” Good said. “I penciled in no change in planted acreage, which means we would harvest about 2 million acres more in 2013 than we harvested this year when we had such large abandoned acres of corn.

“We’re looking at the potential of a 14.5-billion-bushel corn crop in 2013. That was about the number people were talking about in the spring of 2012 when we planted the crop record early and had prospects for record corn yields.

“I’m putting that scenario back on the table for 2013. I think there’s a real possibility that’s what we’re going to be looking at.

“Under that scenario then, you would expect to see a combination of lower prices, increased corn consumption and larger stocks at the end of the 2013 marketing year.

“We consume corn through exports, crush it into ethanol or we feed it. If we have a larger crop and lower prices in the upcoming marketing year, then I would look for exports to rebound from the extremely anemic level of this year, which is projected to be a 38-year low on corn exports.

“Whether we would get a full recovery back to 1.8 billion bushels, that may be a bit generous, but I think the direction is correct if we would lower process, we would see some rebound there.”

The ethanol market currently is in transition, according to Good, with a rapid buildup in corn use for ethanol, driven primarily by renewable fuel mandates and peaking about 5 billion bushels the previous two marketing years.

Current projects have 4.5 billion bushels of corn utilized for ethanol this marketing year, down 10 percent.

“Two things are happening in the ethanol market. One, we’re rapidly approaching the E10 blend wall, and we’re just running out of room to put ethanol,” Good said. “Secondly, we are seeing a recovery in imports of ethanol from Brazil to meet the advanced biofuels standard.

“That’s a market that is reaching a plateau, and we don’t see that as a growth market going forward, so I have penciled in just a modest increase in corn use for ethanol for the 2013 marketing year.”

The feed use for corn is a bit complicated as the recent downtrend in corn feeding has been driven primarily by the substitution of distillers grains for whole corn in the livestock rations.

“Even so, the projection for the current year of 4.15 billion bushels is awfully small, and that’s one reason that I think the December stocks number could be a little bit on the friendly side — given livestock numbers, slaughter weights, it doesn’t appear to me that we’ve made much adjustment yet in feed demand, except in the beef cattle sector,” the economist said.

“I’m looking for that report to show a pretty rapid rate of feed use in the first quarter, probably eclipsing what’s been forecast. Short-term, that could be a source of a little price strength.”

Going into next year with a projected 14-billion-bushel crop and lower prices suggests that feed use then rebounds to a more normal level.

“I probably would argue that my projection here is a little generous. We may not see that kind of full recovery, but certainly in that direction,” Good said.

“Still even with what I consider generous projections on the consumption side, we would see a fairly significant buildup of inventory of corn at the end of the 2013 marketing year. Certainly nothing like we had in the early and mid-1980s, but back to what we’ve kind of experienced in the last 10 or 15 years in that 2-billion-bushel range perhaps.

“We could see inventories increase up to that level, much more comfortable than what we’ve been experiencing this year. If that is the scenario that unfolds, then we would expect prices at some point to fully transition back to pre-drought levels.

‘So from something around $7 this year as a farm price, we would see something maybe closer to $5 for the 2013 marketing year, and quite frankly, that projection seems optimistic to me. I think we could be considerably lower than that with a 14.5-billion-bushel crop.

“That’s driven by the expectation of a full recovery in yields, and that’s something that will unfold over the next several months, but I think it’s a real risk at this point.

“Normally with this kind of price outlook, you might say we expect prices to be $4.50 to $5, and the market is closer to $6 would suggest that we might want to be pretty aggressive in forward pricing next year’s production.”

Good said one factor to consider is the timing of the projected price decline.

“I think you could make an argument that even if we eventually end up at these price levels, it’s probably not going to happen in the first quarter of the calendar year, and that’s important because February is when we determine the insurance price guarantee for the 2013 crop.

“While I’m a bit negative for price prospects into the last half of 2013, I think you could make a case that we could stay pretty strong in the first quarter, and if that’s the case, then we have a fairly attractive insurance price, and that provides us the protection from this eventual decline should it happen.

“Rather than being aggressive forward pricing, we could take the option of the crop insurance. I think that’s an extremely important consideration for 2013.”