May 14, 2012

 

US corn production surges may drive prices down

 

 

Because of expected surges in production and surplus stocks, Iowa's corn now may be worth as much as US$2/bushel less than last year's crop, according to the USDA Thursday (May 10).

 

"That will cost farmers a lot of revenue," said Jim Fausch this week as he looked over the thin green lines of newly-emerged sprout of corn plants on his land near Alleman in northern Polk County. With costs for fertiliser, seed, diesel and rents approaching US$5 per bushel this year, Iowa farmers who were comfortable last year with an average price of US$6.20 per bushel for their corn may have a tighter squeeze if prices drop to as low as US$4.20 per bushel, as forecast Thursday by the USDA.

 

Larry Petersen, president of Heartland Coop, said Thursday "a major question will be high quickly the input costs will follow prices down. Input costs tend to rise and fall with prices. If farmers' costs go down quickly, then we'll be all right. If not, things will be harder."

 

The lower corn prices would not be entirely negative for Iowa. Livestock feeders would enjoy lower feed costs and the state's 41 ethanol plants, which are battling negative margins after the removal of the US$0.45 per gallon tax credit at the end of last year, would see some relief on their costs. Consumers could see a halt to a rise in food prices, which went up almost 10% last year and as much as 20% for some cuts of beef as well as bacon. Already wholesale beef and cattle prices have begun to drop in the last month.

 

One factor that will help farmers - and their lenders - sleep at night is soy, whose tight supplies this year mirror the supply problems of corn in 2011. A record-low soy surplus number enabled soy to close Thursday up US$0.25 per bushel to US$14.52 for May and US$13.59 for the November contract. Des Moines commodity trader Don Roose said "soy will be the last bull standing in the grain market."

 

Corn, by contrast, continued its descent from the plus-US$7 per bushel level it stood a year ago. On Thursday the May contract was off US$0.15 per bushel to US$6.25 and the December contract, which prices this year's crop, fell US$0.10 per bushel to US$5.07. The December contract has lost 12% of its value since early February, but worries abounded about Iowa's dry soil conditions. Those concerns were alleviated by generous April showers.

 

"Farmers will have less cash to spend, and the Iowa economy will feel it," said Iowa Secretary of Agriculture Bill Northey, who on Thursday was on his way to his farm near Spirit Lake to finish his corn planting. The corn price boom not only boosted Iowa farmland prices to record levels but generated hiring at farm equipments manufacturers such as Deere & Co., Vermeer, Titan Tires and Bridgestone, but also expansion of the workforces at seed companies such as Pioneer Hi-Bred and Monsanto.

 

The USDA report issued before the market opened Thursday wasn't unexpected, but still contained a jolt when it declared "season-average farm (corn) price is projected at US$4.20-5.00 per bushel, down sharply from the 2011-12 record projected at US$5.95-6.25 per bushel." The reason for the projection of lower prices is right out of Econ 101; while US and world corn supplies have been tight the last two years, leading to record prices in the US, expected surges in production here and abroad are likely to almost double US surplus stocks to 1.9 billion bushels after the 2012 crop is harvested.

 

The USDA has said farmers will plant 96 million acres of corn this year, the most silence 1937, and with the crop off to a good planting start, a yield of 166 bushels per acre is expected. That would translate to a record harvest of almost 15 billion bushels. With demand from exports, livestock feeders and ethanol producers flat, the USDA said, the surplus is bound to grow and dampen prices.

 

Another problem for corn is the abundance of wheat, which is expected to see a 12% increase in production this year in the US. Wheat can be substituted for corn as a livestock feed, and a USDA suggestion that a big winter wheat crop coming on in June and July would elbow corn to the sidelines in feed grain markets. The rest of the world is stepping up. The USDA said Thursday coarse grain supplies for 2012-13 are projected at a record 1,389.2 million tonnes, up 6% from 2011-12. Global corn production for 2012-13 is projected at a record 945.8 million tonnes, up 75.3 million from 2011-12, with the largest increases for Argentina, Mexico, Canada, South Africa, China, and Ukraine.

 

Some traders saw optimism in the lower prices which could attract more foreign buyers. Corn exports are off about 8% this marketing year from the year earlier, and competition from cheaper corn from the Ukraine and Argentina is a reason. Everybody is watching China, the Great White of world markets. China has propped up US soy prices by taking 60-70% of American exports. On corn, China still averages barely 10% of US foreign sales, but its nibbles are getting bigger with current year purchases up nine fold over last year. But corn accounted for more than two-thirds of the US$20 billion in cash that grain brought to Iowa's economy in 2011.