DR. DARREL GOOD Extension Economist University of Illinois
D
outlook grain
ecember 2010 corn futures moved above $5.00 in mid-Sep- tember, moderated in early Oc-
tober, and then moved sharply higher following the USDA’s October Crop Production report. The month of November started with new highs for that contract. Even though prices are at the high-
est level since July 2008, some ana- lysts are projecting even higher prices, with $7.00 being a favorite target. The obvious question is why are higher prices needed? The role of the corn market is two-fold. First, corn has to be priced so that current supplies last until the next harvest. Second, corn prices have to motivate sufficient production in 2011 to meet needs during the 2011-12 marketing year. The second objective is met pri- marily by directing acreage decisions in 2011. Corn prices continue to ad- just as the market’s assessment of the “right” price needed to meet these objectives changes. This as- sessment changes on the basis of unfolding information about the strength of demand and about corn yield risk in 2011. The issue of allocating current sup-
plies is typically evaluated based on the pace of consumption relative to available supplies. If consumption is proceeding too rapidly, so that sup- plies are likely to be consumed be- fore the next harvest, prices increase to slow the pace of consumption. If the pace of consumption is too slow, so that year ending supplies will be in surplus, prices decline to encour- age more consumption. For the cur- rent marketing year, corn supplies are estimated at 14.382 billion
Are Higher Corn Prices Needed?
bushels and consumption is projected at 13.48 billion bushels. Stocks at the end of the marketing year are pro- jected at 902 million bushels. Year ending stocks cannot re- alistically be reduced much below the projected level so there is little room for con- sumption to exceed the pro-
jected level. Is there any evidence that corn is
being consumed too fast? Feed and residual use of corn is the largest segment of U.S. corn demand, but the rate of consump- tion cannot be calcu- lated until
the
release of the De- cember 1 Grain Stocks report on Jan- uary 12, 2011. The USDA is forecasting a generous level of feed and residual consumption of 5.4 billion bushels. It is unlikely that the pace of consumption exceeds the projected level. Corn exports during the current
ued, corn use would exceed the pro- jected level of 4.7 billion bushels by 680 million bushels. Such a large rate of increase will not be main- tained, and feed use of corn will be reduced if production of distillers’ grain exceeds the current projection. Still, corn is currently being con- sumed too fast and a substantial slow down is required. Three important developments will
add further information to the as- sessment of the pace of consump-
Even though prices are at the highest level since July 2008, some analysts are
projecting even higher prices, with $7.00 being a favorite target.
marketing year are forecast at 2 bil- lion bushels, or an average of 38.5 million per week. The total is only 13 million more than exported last year. Export inspections during the first 8 weeks of the year averaged 34.3 mil- lion bushels per week. Cumulative inspections are 5.9 percent below last year’s total. Unshipped export sales as of October 21, however, stood at 520 million bushels, com- pared to only 405 million on the same date last year. The pace of ex- ports and export sales present a mixed picture – large sales, but slow shipments. The USDA forecasts that corn used
for ethanol production during the current marketing year will be 3.1 percent more than used last year. During the first 8 weeks of the mar- keting year, ethanol production ex- ceeded that of a year ago by 18 percent. If the current rate of in- crease in ethanol production contin-
tion. These include the updated corn production forecast to be released on November 9, prospects for Chinese imports of U.S. corn, and the fate of the $.45 per gallon blender’s tax credit for ethanol. Last week, we made the case for
the need for more corn acres in the U.S. in 2010. Does the price of $5.40 for December 2011 corn futures pro-
vide enough incentive to expand corn acreage by 5 to 6 percent next year? Even with November 2011 soybean futures near $11.70, projected crop budgets for 2011 show an economic advantage of corn production com- pared to soybeans in the Midwest. Corn prices, then, appear high enough relative to the major compet- ing crop for corn to capture more acreage next year. The question may be whether or not there is enough acreage available to get the large in- crease that appears to be needed. That depends in part on how many additional acres will be brought into production in 2011 and how many acres are used for winter wheat, cotton,
and a variety of minor crops. A case can be made that old crop
corn prices need to move higher to slow the pace of consumption. Prospects for new crop prices are not as clear. Current prices may be high enough to attract sufficient acreage in 2011.
have to increase later.
If not, those prices may ∆
DR. DARREL GOOD: Extension Economist, University of Illinois
Ethanol And Oil Subsidies CONTINUED FROM PREVIOUS PAGE
role of ethanol in using up to 4 billion bushels of corn a year. If the ethanol industry were to shrink in the ab- sence of the subsidies up for renewal this year, corn prices could end up somewhere south of the loan rate. If that were to happen, we could see LDPs (remember them?), soaring fed- eral expenditures, and people talking about how US policy has hurt the in- come of farmers around the world. Whaddawe think about ethanol sub-
sidies? Well, to start with, it is compli- cated. And how we deal with them could affect farm prices around the world.
∆ DR. DARYLL E. RAY: Blasingame
Chair of Excellence in Agricultural Pol- icy, Institute of Agriculture, University of Tennessee DR. HARWOOD D. SCHAFFER: Re-
search Assistant Professor at APAC, University of Tennessee
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November 5, 2010 / MidAmerica Farmer Grower • 3
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