The U.S. corn market appears to have reversed its downward price cycle, says George Shumaker, University of Georgia Extension economist. “The constellations are starting to align themselves, and the opportunity for higher prices may be forthcoming in 2001,” predicted the economist, speaking at the Georgia Corn Short Course in Tifton.
The first piece of information that'll affect the market is how much corn will be planted this year, says Shumaker. “At this point in the year, the consensus is that the U.S. acreage will be lower this year. We're not sure exactly what our acreage will do in Georgia. Some people are talking about acreage increases. If that's the case, we might hold our own in terms of acreage,” he says.
Increased fuel and nitrogen costs could be a negative in terms of expanding corn acreage in 2001, he adds. “Nationally, we could see acreage decline by about one and a half million acres. That would bring acreage in at about 78 million planted this year. Harvested acres typically are about 91.5 percent of planted acres, giving us a harvested acreage of about 71.5 million,” says Shumaker.
Over the last couple of years, a modest downtrend has developed for U.S. corn acreage, and that's price-positive for the market, he says. By lowering the acreage base, the supply hopefully also will decrease, he adds.
The next big piece to the market puzzle, notes Shumaker, is how yields will perform in 2001. Mother Nature, he says, has a way of overriding the best intentions.
“Over the past few years, yields have been above average, for the most part, across the United States. This past year, nationwide corn yields were excellent. If we follow the trendline of recent years, the 2001 average yield should come out at about 128 bushels per acre.
“This past year, our average harvested yield was 137 bushels per acre. If we do that well in 2001, our supply wouldn't decline nearly as much as we might want it to. But who knows how the weather will be this year?
“It has been five to six years since we had a major yield problem here in the United States. We typically don't go that many consecutive years without a weather event of significant magnitude to reduce national yields. At some point in time, we'll probably encounter such an event.”
Multiplying 71.5 million acres times 128 bushels per acre would result in a 2001 corn crop of approximately 9.15 billion bushels, or about one-half billion bushels less than the 200 crop, says Shumaker.
Carry-in stocks, or the amount of corn carried over from the previous year, also must be entered into the market equation, he continues. “Going into harvest this fall, we'll be carrying in about 1.8 billion bushels. When we add that to the estimated 9.15-billion-bushel production, we get a total supply of just under 11 billion bushels. That would be a reduction of about 700 million bushels from what we had to dispose of this past year.
“So, on the supply side of the equation — at least early on — we have a price-positive factor of lower stocks. On the supply side, there's definitely some good news out there.”
Positive trends also can be found on the demand side of the equation, says Shumaker. There has been a very strong uptrend in corn usage over the past several years, he says.
“A majority of that increase comes from domestic usage, and that's one area where we have more control and better opportunities to make accurate predictions.”
Export market variability
Much of the variability in corn offtake comes from variability in the export markets, he explains. “The United States is a residual corn supplier around the world. When other countries have shortfalls or supplies that are not available, they come to the United States to meet those demands. So, it's more difficult to predict what'll happen with exports.”
Reports from China indicate that the internal price for corn has been increased in that country in an effort to stimulate production, says Shumaker. China typically has been a corn importing country, he says, but now has become a corn exporter.
“They would compete with us for that Southeast Asian market, and that's an important part of our corn market. Every bushel of corn sold by one of our major competitors in the export markets potentially crowds out one of ours. If there's a cloud out there, it could be coming from China.”
Looking in more detail at the demand side of the equation, Shumaker says feed use is the most important sector in the domestic market. Feed demand is measured, he adds, by “grain consuming animal units.” This measurement, he says, is expected to rise by a little more than one percent this year.
“There's more and greater demand out there, and that's a good sign,” he says. “In addition, there are positive signs from human consumption.”
Higher fuel prices, notes Shumaker, cut both ways in their effect on the corn market. “Higher fuel prices raise our cost of production and they raise our cost of transportation, which affects marketing. But high fuel prices also contribute to the demand side of the equation.
“Increasing fuel prices make ethanol that much more competitive. We're likely to see substantial increases in ethanol production. That could contribute three to four cents to the price of corn this year. Whether that will be enough to offset the increase in production costs is yet to be seen.”
If the market sees a half-billion bushel reduction in production and a modest increase in offtake, the result will be a drop in ending stocks, and that's always price-positive, says Shumaker.
“There's a major correlation in the direction of prices and the direction of ending stocks. We'd have to see a major increase in national yield and acreage to move this market in the other direction. Undoubtedly, we'll draw down stocks to some degree.
“When our ending stocks decline, as a percent of year's worth of use, we get price increases. If ending stocks finish somewhere around 1.1 to 1.2 billion bushels, that would reduce our ending stocks to about 11 percent of a year's worth of use.”
This past year, U.S. corn producers saw an average price of $1.85 per bushel. “We could see prices this year averaging a basis of $2.30 to $2.40 per bushel. There are a lot of ‘ifs’ in this equation, but it could happen.”
As growers begin to consider pricing decisions, they should consider in what direction the “prevailing winds” of the market are blowing, says Shumaker. One method is to look at the seasonal tendency of prices, he adds.
“After harvest and going into the storage season, we typically see prices rising. We usually reach a point at which they begin to decline. In five of the past six years, prices have behaved in this textbook fashion. If we have normal weather, we can expect normal seasonal price movements.”
If a grower currently is holding corn, he must decide how much longer he should hold onto it, he notes. The market, he says, usually sees a peak in March.
“The market usually trends upward until we get that planting intentions report on March 31. If I'm holding corn, I might want to do something before that report is issued. Once the report comes out, prices may not continue rising, especially if the report confirms earlier beliefs about planting intentions.
“The next action in the market is likely to come around the end of June, when the Midwest crop begins to pollinate. I like to use the July 4 weekend as a cutoff point when the markets tend to head south. We want to price a portion of the crop by July 4.”