With the release of USDA's Planted Acreage Report for 2011 and USDA's latest quarterly Grain Stocks Report (both released June 30) corn and soybean markets have some new guideposts. The reports are both based on surveys conducted in early June.
One of the reports indicates that the current supply of corn in U.S. bins is a little bigger than expected. And the other report says farmers in the U.S. are planting about 5% more corn acres in 2011 than they did last year.
Both of these reports indicate a fundamental shift in the corn market, suggesting corn prices could come under considerable pressure as the crop moves through the growing season and into fall. Corn growers are now faced with prospects for a large corn crop and prices will likely slide if the big crop continues to develop. But just how far prices will decline is the big question.
That's the conclusion of two well-known Extension grain marketing economists. Chad Hart is at Iowa State University and Darrel Good is at the University of Illinois.
U.S. has more corn on hand than the market anticipated
Both the USDA corn stocks estimate and the planted acreage estimate caught the market by surprise on June 30 in a very bearish way. The reports are based on survey data gathered around June 1 or in early June, notes Hart.
"The June 1 stocks number estimated at 3.67 billion bushels is 350 million bushels more than the average trade guess and implies that we have slowed our consumption of corn for feed and residual use," says Good. "We'll have to wait until the September USDA grain stocks report to reconcile the numbers, but on the surface we've got a lot more corn on hand than the market anticipated."
"Year-ending stocks will also be larger than what was projected before the stocks report was released June 30," he adds. "The planted acreage number of 92.3 million U.S. acres is about one and a half million more than the average trade guess and a surprising 100,000 acres more than indicated in the March USDA Planting Intentions Report."
Even with acres lost to flooding, 2011 crop looks big
Hart points out that even with some lost acres due to flooding, it looks like the 2011 U.S. corn crop will be a fairly large crop, assuming the growing season continues with favorable weather.
Corn growers are now faced with prospects for a large crop and prices that will likely slide. Just how far prices will fall is the question.
"Assuming that the growing season continues without any widespread severe, threatening weather and the market starts thinking that we'll have a 160 bushel yield on corn for the U.S. average this year, I think we're going to see a gradual decline in corn prices right into harvest," says Good. "Obviously that could get interrupted with some weather problems, but if it doesn't, I'd say we're on a downward trajectory right into the harvest period."
But it's hard to predict how low corn prices will go
Good and Hart both say it's difficult to predict how low corn prices will go and they note corn is still about $3 higher per bushel in the spot corn market than a year ago.
However, this new information does suggest there is considerable downside risk for corn. Even though we've seen substantial sell-off selling immediately following the June 30 report, there may still be some opportunity for upward movement and chances to add to your sales, the economists point out.
In 2007, the price of corn rallied in the fall. Could that happen this year?
Corn consumption has now leveled off, acreage is huge
"In 2007 and into 2008, we were on an upward movement in terms of consumption of corn," says Good. "The ethanol industry was still expanding rapidly in its consumption of corn. We just don't have that situation now. I think corn consumption has plateaued for all of our domestic markets and perhaps exports as well. We don't want to get too bearish and say that the prices are going to go down forever, but I think fundamentally the demand side looks very much different now than it did four years ago."
The numbers in the June 30 USDA Acreage report mean that this year's U.S. corn acreage is one of the largest plantings on record.
"If you go back into the history book on corn plantings and look at the 1940s, you might find bigger acreage, but in modern times, 2007 had record corn acres and now 2011 looks to be the second largest," says Good.
What if U.S. begins widespread use of E15 ethanol?
How does EPA's plans for allowing the use of 15% ethanol blends in motor fuel nationwide affect the corn market? Both Good and Hart believe that use of the 15% blend by motorists could accommodate current policies in terms of mandated levels of biofuels production.
"If the U.S. eliminates the tax incentive for ethanol blenders, we may be looking at ethanol production coming down because we would not be producing above the mandated level," says Good. "If the tax incentive goes away and fuel prices come down a bit, then we may see blenders drop back to just blending the mandated levels for biofuels in the year ahead. That's a lot of 'ifs' but even if the blenders don't drop back, we're still saying the rate of increase in ethanol production has slowed considerably, and with that in mind we're not going to see the growth spurt in ethanol production that we've seen in the past three years."
Good thinks year-ending stocks of corn for the crop marketing year may be closer to 900 million bushels by Sept. 1, 2012. Stocks will grow if this year's crop is big and corn demand softens as it now looks like it will.
What's the supply-demand-price outlook for soybeans?
USDA's June 30 grain stocks in all positions report, based on surveys taken around June 1, shows soybean stocks were a bit higher than expected, close to 30 million bushels.
The acreage estimate for soybeans was also somewhat of a surprise—in the opposite direction. The estimate of the number of planted acres for soybeans, at 75.2 million acres in the U.S. in 2011, came in well below expectations.
"The 2011 U.S. soybean crop could come in considerably below what USDA has projected for consumption for the upcoming marketing year, which begins September 1, 2011," says Good. "So, unless we have quite good yields this year for soybeans, we may be in a rationing situation on the soybean crop next year, like we thought we would have on corn for the current marketing year.