Just a month ago Ag economists fretted about falling grain prices from a robust 2012 crop. Now, with farmers baling up spindly corn stalks and settling with crop insurance adjusters, those same economists are trying to make sense of the worst drought since 1988.
"The real question is yield," says University of Illinois economist Darrell Good, who spoke to a group of 200 farmers at this week's Top Farmer Crop Workshop at Purdue. "The question now is, how much lower can average yields go?"
Trend yields, which had been rising 2 bushels an acre long-term, would have been around 161 bu. per acre this year. USDA's latest number is 146 bpa. Prices are moving in a way that suggests USDA believes this crop could drop another 10 to 15 bpa. Good, who pegged the crop at 145 bpa, says "all the risk now is on the downside."
USDA's report this week shrunk this crop to 12.8 billion bushels, down from 14.8 billion earlier in the year. Ethanol, exports and livestock will have the greatest impact on demand going forward with rationing already in play. Good believes 4.8 billion bushels will go to make ethanol if the Renewable Fuels Standard (RFS) is not adjusted by Congress. "We should have no issue meeting the mandate for 2012, which is 13.2 billion gallons of renewable fuel," he says." For one thing we have ethanol stocks in hand, but there is still a concern over the economics of making and blending ethanol from expensive corn."
Good differs with USDA on corn export projections. USDA had projected 1.9 billion bu. earlier but lowered that figure to 1.6 billion bu. Thanks to China, "I believe export demand could be more robust that 1.6 billion and that has tremendous implications for domestic use, year-end stocks and ultimately, the price level of corn," he says.
The real head scratcher in demand has been in feed and residual use. "This year it pencils out to a pretty low year," says Good. "The thinking is, we will harvest more new crop than normal before September, and that will substitute for old crop corn. Regardless of what it substitutes for, it will all show up in the feed and residual category for the fourth quarter."
Last month USDA projected huge feed and residual levels of nearly 5.5 billion bushels. There will be livestock liquidation, which cuts demand somewhat. "At some point with a 145 bu. average yield, there will be a rationing decision – who's going to get the corn?" says Good. "If yields drop to 135 bpa, are we going to force the livestock industry to make the adjustment, or will there be some intervention in ethanol, such as a partial waiver of the RFS mandate next year.
"Washington is probably thinking about that right now."
Keep up on the drought Farm Progress is pooling all the coverage of the drought from across the country into a single place - www.DatelineDrought.com - where you can see a daily video from Max Armstrong, Farm Progress director of broadcast, and Farm Futures Senior Editor Bryce Knorr, along with national, local and regional coverage of the ongoing drought across the heart of the country.
Keep up on the drought
Farm Progress is pooling all the coverage of the drought from across the country into a single place - www.DatelineDrought.com - where you can see a daily video from Max Armstrong, Farm Progress director of broadcast, and Farm Futures Senior Editor Bryce Knorr, along with national, local and regional coverage of the ongoing drought across the heart of the country.