April 2, 2007

 

Big corn crop forecast by USDA may not curb prices

 

 

Strong demand for ethanol and poor spring weather could keep corn prices high over the next few months, even though the government estimated Friday (Mar 30) that this year's corn crop could be the largest it's been since 1944.

 

Fuelled by a booming demand for corn-derived ethanol, corn farmers across the nation are expected to plant 90.5 million acres of corn this year, according to the US Department of Agriculture's Planting Intentions report. With projected yields at 152 bushels per acre, the final corn harvest could amount to the largest on record, according to the National Corn Growers Association (NCGA). At the same time, soybean acreage is expected to be sharply down.

 

The market reacted immediately Friday morning, fearing that a large crop would flood the market with corn. At the Chicago Board of Trade, corn prices fell 20 cents --the daily limit--to US$3.745 a bushel.

 

However, several factors make it less likely that corn prices will drop much further. Demand for corn-based ethanol is projected to remain strong, especially as more ethanol plants come online in the US and as oil prices continue to hover around US$66 a barrel.

 

Ethanol is expected to consume 3.2 billion bushels of corn from the 2007 crop, compared with 2.15 billion bushels of the crop last year, says Keith Collins, chief economist at the USDA.

 

But Mr Collins says that while ethanol will continue to "put pressure on our land base to keep finding ways to produce more corn," the crop report is a good sign that corn farmers are responding to market signals and planting more corn.

 

But planting intentions can be much different than planting outcomes, which won't be clear until the end of June when the USDA releases its next updated planting figures. Over the past 20 years, USDA planting-intention reports have been higher than actual plantings 70 percent of the time, according to the NCGA and weather has a lot of influence in that.

 

This year, as in every year, risk of bad weather could cut into corn yields. Showers are expected in the Midwest during the coming weeks, and some long-term forecasts show a generally cold, wet spring and a hot, dry summer. Thus, farmers might have to delay putting corn seed into the ground by a few weeks, which could ultimately cut into their yields come fall harvest.

 

Still, some analysts think corn prices will continue to fall. "People in the financial community seem to think that corn prices coming down is in some way something bad," says David Driscoll, analyst at Citigroup. "It's not. Having corn anywhere around US$3 [a bushel] is a very good price for corn farmers."

 

Lower corn prices would be positive for many US industries, including ethanol producers and high-fructose corn syrup (HFCS) producers like Archer-Daniels-Midland Co.

 

For farmers who have not yet signed contracts to sell their grain, however, lower prices could sour the enthusiasm that has gripped the Corn Belt over the past several months as corn topped US$4.

 

For livestock producers, the report is a mixed bag. The livestock industry has complained that high corn prices are cutting into their profit margins, because corn-based feed accounts for one of the largest costs in raising cattle and pigs. While more corn is good for that industry, corn acres have come at the expense of soybeans, which are also a key feed component.

 

"This is definitely a mixed report," said Bill Roenigk, chief economist of the National Chicken Council. "Much of the increase is coming out of soybeans, also a critical crop for us." The poultry industry is a major buyer of soybean meal for dietary protein as well as corn for energy.