U.S. corn acres for 2006 may not decline as much as analysts have been thinking with December futures prices over $2.50 at the time of this writing, strong exports and ethanol use and fuel prices in the wholesale market headed down.
But the corn market is sure to be affected this year by commodity and index fund involvement and the ability of U.S. farmers to produce high corn yields under even the most trying environmental conditions, according to Richard Brock, president of Brock Associates, a commodity marketing and consulting firm, Milwaukee, Wis.
“Commodity funds and index funds now have more influence on the market,” said Brock, speaking at the Mid-South Farm and Gin Show, in Memphis, Tenn. “The amount of money in commodity funds went down last year because a majority of them lost money. But as of Dec. 31, there was $130.5 billion in commodity funds in the ag markets; prior to that, it was $131.9 billion. Four years ago, it was only $22.8 billion.
Brock predicts that some time in the future, money will flow out of index funds “just as fast as it's going in. People who thought commodity prices could only go up will be getting out. If we go through a bear market in energy and then go through a bear market in grains, a year after that, there won't be as many index funds around. If we stay in bull markets, they'll stick around.”
In the meantime, the funds continue to distort the market and actually provide support in the short term in a fairly predictable way, according to Brock. “Most of the index funds buying occurs the first three days of the month. Just look at the markets for the past few months. On the first three days of the month, the markets are strong as the index funds are establishing their positions.”
A rule change at the exchanges now allows the funds to put more money in the commodity markets, Brock noted. “Up until a year ago, the biggest position a single commodity fund could take in the corn market was 9,000 contracts, or 45 million bushels. On June 10, 2005, the limit was raised to 77.5 million bushels of corn and then it was raised again to 110 million bushels.
“By June 12, 2005, the corn market had a significant spike due largely to the fact that the big funds came in and increased their positions. This has been a huge change. Over the next two years, the volatility of these markets is going to be much higher.”
The market will also provide its share of Alka Seltzer moments. “When that market turns, the downside is going to be dramatic. Ultimately, the fundamentals are going to determine what happens to the price of soybeans, wheat, corn, cotton and rice.”
A savvy corn farmer could pencil in some profits this year, and that could add up to not so much of a decline in corn acres this spring, according to Brock. “The average price of December corn futures during February averaged $2.59. With revenue insurance, you can lock in some good revenue. With natural gas prices dropping and the high average futures prices during February, plantings going under 80 million acres isn't going to happen.”
Strong ethanol usage, while encouraging, does not necessarily portend higher prices, according to Brock.
“Everybody needs to get off the emotional bandwagon that ethanol is bullish corn. It's bullish corn at what price? Is it bullish at the $1.60 variety or the $2.60 variety? People think if something is bullish, it has to go up. It doesn't.”
But ethanol has created excitement. Ethanol use is expected to increase from 1.6 billion bushels last year to 2.13 billion bushels this year. “That's a dramatic increase, but you'll notice that as ethanol usage goes up, feed usage actually flattens out or goes down even though we have larger numbers in livestock. The reason — when we crush 100 million bushels of corn at an ethanol plant, we only increase usage by about 65 million bushels because 35 million bushels goes back into the market to replace corn as a cattle ration.”
Brock anticipates lower carryover supplies for corn, although much rests on the shoulders of U.S. corn producers and technology. “We're using trend line yields of 149 bushels for corn. If we plant 81 million acres and harvest 74 million acres, we would have a crop of 11 billion bushels. Carryover would drop to 1.94 billion bushels and give us a stocks-to-use ratio of 16.9 percent. During the year of the bull market in 2003-04, the ratio was 9.4 percent. At 16.9 percent, you would have an average corn price of around $1.90 to $2.20.”
There are two extremes to consider as well, according to Brock. “Under a bullish scenario of 79.5 million acres planted and a yield of 142 bushels per acre, carryover would be 1 billion bushels. Under that scenario, December corn at today's price is cheap. I don't think this will happen, but it is a possibility. If 82 million acres are planted, and we have a 150-bushel corn yield, the carryover becomes almost 3 billion bushels, even with all the increases in ethanol.”
Brock wouldn't throw out either of those possibilities, given the fact that two years ago the national average yield in corn was 160 bushels. “What's happening with yield is incredible. With new triple-stack hybrids, growers can get 80 percent of their potential with only 3 inches of rain.”
With a December corn futures average price of $2.59, Brock doesn't believe acreage will be down more than 1 percent. “If a farmer can get 180 bushels an acre without irrigating and has revenue insurance, he's going to plant corn.”