June 7, 2007

 

US corn output drop may lead to agricultural policy changes

 

 

Shortfalls in US corn production, given the need to ensure adequate supplies in 2007 to meet anticipated demand, could have a major impact on prices and agricultural policy, according to a recent study by the University of Illinois Extension.

 

The study, titled "2007 US Corn Production Risks: What Does History Teach Us?," outlines several different production scenarios for the 2007/08 marketing year but focuses on the possibility of lower production and its potential impact on prices and demand.

 

"The odds based on history show that one out of every five years since 1970 production is more than 10 percent below expected levels and one out of every 10 years production is more than 20 percent lower than expected," Darrel Good, a University of Illinois agricultural economist and one of the study's authors, told Dow Jones Newswires.

 

The study used a production figure of 12.290 billion bushels for the 2007/08 crop year, as its "normal" production outlook, which is below the 12.460 billion bushels forecast earlier this year by the US Department of Agriculture's World Agricultural Outlook Board.

 

Production at this level would result in ending stocks of only 692 million bushels, as a 1.25 billion bushel increase in corn used for ethanol more than offsets modest declines in exports and feed usage, Good said.

 

In May, the USDA projected 2007-08 corn-ending stocks at 947 million bushels.

 

A 10 percent decline in corn production this year from normal would result in an 11.061-billion-bushel crop, while a 20 percent shortfall in production would result in a 9.83-billion-bushel crop.

 

A crop size of 11.061 billion bushels would result in declines in feed usage and exports by 11.5 percent and 10 percent, respectively, because both are relatively price elastic compared with ethanol, Good said. Ending stocks would fall to 463 million bushels, which reflects a corn stocks-to-use ration of 4 percent.

 

As a result, corn prices would need to rally to the record high prices set in the spring of 1996 and probably exceed those levels to accomplish rationing of demand needed, he said.

 

A further decline in production to 9.832 billion bushels, or 20 percent less than "normal," would further highlight the need for rationing supplies, with corn used for feed estimated to fall 22.6 percent and corn exports 20 percent. Corn-ending stocks would decline to 414 million bushels, the report said.

 

A decline in production of 20 percent would also trim the amount of corn used for ethanol, though corn prices would have to be high enough so the most inefficient plants could not recoup the variable cost of production.

 

Under this scenario, the average farm price for corn would probably exceed US$5.00 a bushel, the study noted.

 

The high price for corn will likely trigger a large decline in meat production. Meat supplies would initially increase over the near term, but eventually there would be higher prices because supplies would fall 10 percent-15 percent, with some producers exiting the business, Good said.

 

Policy implications would be few if any, if the crop size were 10 percent lower to 16.7 percent higher from spring expectations to actual fall production levels. Corn usage in this range of production would be managed by price signals with no policy intervention. However, an extreme shortfall in corn production could lead to possible government intervention, Good said in the report.

 

One analyst noted that government intervention was unlikely but could happen if a drop in production was severe.

 

Shawn McCambridge, senior grain analyst at Prudential Financial agreed, noting it would take an extreme situation to require government intervention, on the order of a 20 percent drop in production and only if the market "doesn't do a good job of rationing demand through higher prices".