West Kentucky Grain Market Project
Monthly Market Update for January 2007
January 16, 2007
The corn market reacted in a very strong manner to USDA's January reports. The reaction was so strong that soybean and wheat prices were pulled up substantially even though the data for those two crops was suggestive of lower prices.
The limit up move in Chicago Board of Trade (CBOT) futures prices for all of the "old-crop" 2006 corn contracts, i.e. March, May and July 2007 contracts, and many of the 2007 "new-crop" contracts, i.e. December 2007 and later contracts, was attributed mostly to an unanticipated drop in the "final" corn production estimate for the 2006 harvest.
Corn traders were, on average, looking for a modest reduction in crop size of less than 50 million bushels while USDA lowered the number by 210 million bushels. USDA also lowered their estimate of feed/residual use of corn (-75 million bushels) but as expected increased their estimate of U.S. corn exports (+ 50 million bushels). The net effect of all changes on the corn balance sheet was a further tightening of the projected ending corn stocks to only 752 million bushels (traders were expecting a number around 900 million bushels). This represents a stocks/use ratio of only 6.4 percent, the second tightest on record. The smallest stocks/use ration, at least in recent history, was the 5 percent level recorded at the end of the 1995- 96 marketing season when corn futures topped out (in July 1996) at an all-time high of $5.545 and the season's average farm price was $3.24 per bushel -- just one cent shy of the record set for the 1983-84 drought damaged crop.
Additionally, given the current projection (11.76 billion bushels) by USDA of total corn use for the 2006-07 marketing year, which ends August 31, 2007 the U.S. will have only about 3.3 weeks of corn supplies left – 752 million bushels/226 million bushels used per week. This implies supplies will be hard to find in some markets by early August. And it also implies early harvested corn could receive a premium.
However, the bigger news in the corn market is still the story of rapidly expanding use of corn in ethanol production. Currently there is a wide range in estimates of how much corn will be consumed by the ethanol industry for the 2007-08 corn marketing year which will officially begin September 1, 2007.
It is clear the industry is expanding more rapidly than anyone anticipated even 60 days ago. USDA is projecting that corn for ethanol production will total 2.15 billion bushels for the current 2006-07 marketing year. Estimate from industry, trade groups and Universities for the coming marketing year range from near 3 billion bushels to as high as 3.75 billion bushels. Recent comments from USDA suggest the Agency is looking for a number in the low 3 billion bushel area.
It is difficult to keep track of all the new ethanol plants. Are these plants actually under construction or still in the formation stage, when will they be "on-line", will they actually produce at scheduled capacity or perhaps as much as 10 percent more and the same questions apply to the number and size of plants adding capacity.
Current comments by corn market analysts suggest that total use for corn in 2007-08 from all user groups should be in a range of 12.5 to perhaps 12.75 billion bushels if supplies are large enough to keep prices at a level to accommodate such a record large consumption.
The largest corn crop in U.S. history occurred in 2004 with a harvest of 11.8 billion bushels based on a record setting yield of 160.4 bushels/acre (12% above trend yield) on a harvest of 73.6 million acres for grain. To put the situation in perspective consider that a yield of 150 bushels/acre (the second best ever and equal trend yield) on a harvest of 81 million acres (an increase of 10.4 million acres over the 2006 harvest) would produce a crop of only 12.15 billion bushels. This is well below the anticipated consumption levels that market analysts have been talking about and it implies that carryover stocks would shrink below this year's projected very tight ending carryover number to the lowest level on record. The market might not allow a projected carryover stock number of less than 400-500 million bushels. Therefore, either price has to go higher to ration supplies or production has to go up, either with even more acres than just mentioned or a record setting type yield such as occurred in 2004.
Of course all of these "what ifs" are dependent on the continued robust expansion of the corn ethanol industry and solid livestock feed demand for corn and a good export market. If the price of energy were to decline sharply and ethanol prices were to follow suite or U.S. ethanol import rules were to change for the negative the expansion might slow down drastically.
The next "big day" for corn and soybean markets is March 30, 2007 when USDA publishes the Planting Intentions Report. Will U.S. farmers dramatically increase corn acres at the expense of soybeans, cotton, spring planted wheat, CRP and even pasture land? Between now and the end of March the market will be watching the weekly export data (sales and shipments), the monthly soybean crush data, monthly ethanol production data, news about ethanol production capacity and weather in South America as their soybean harvest nears. All-in-all the next few years look to be as exciting and challenging a period as agriculture has ever experienced
For More Information
The West Kentucky Grain Marketing Project: Monthly Market Update is edited by Steve Riggins. You may contact him by e-mail at sriggins@uky.edu.