As with many agricultural commodities, as of early February, corn producers were looking at bearish supply and demand numbers.
“In terms of marketing strategies, we need to first determine breakeven numbers,” said Kurt Guidry at the Louisiana Cotton Forum in Delhi, La. Recently, the LSU AgCenter economist “went back to the 2005 LSU budgets and tried to adjust them mainly for expected increases in fertilizer costs and fuel for 2006.
“I assumed about $2.10 per gallon of fuel and nitrogen prices of about $390 per ton of urea. At those prices, the cost for growing corn in the Red River and central Louisiana area is about $239 per acre. For northeast Louisiana the number is $258 per acre for dryland and $285 per acre for irrigated. Averaging those budgets out, we're looking at about $262 per acre to grow corn across Louisiana. Assuming a 140-bushel yield, these numbers translate to a per-bushel cost of $1.70 to $2.03”
The attractiveness of grain sorghum is it's much cheaper than corn. In the northeast and the Red River area, Guidry said, the cost of production is about $136 per acre. In the southwest part of the state, the number is quite a bit higher at $162 per acre. Combining the numbers, variable production costs for the state sorghum crop is about $145 per acre. Assuming a yield of 85 bushels per acre, per bushel costs for sorghum would be $1.60 to $1.90.
“Those are the variable costs as we look at current markets, potential markets and developing a marketing strategy.”
Last fall, in the aftermath of hurricanes Katrina and Rita, there was a huge spike in natural gas prices. “We were down in the neighborhood of $8 or $9 and moved up to $15 or $16. Since then, the price has come down and that's a positive.” Unfortunately for farmers, Guidry said, the prices have dropped a bit too late to impact spring fertilizer prices. The fertilizer most will use this spring was likely made with natural gas in the $11 to $12 range.
“Similar to that are fuel prices. There was also a big spike in crude oil prices after the hurricanes — above $70 (per barrel). I thought we were headed towards better times because there was a downward trend in fuel prices. But over the last month or so, all fuel prices have begun to climb. Right now, the long-run outlook is for current prices to remain stable in 2006. All that means it will cost producers quite a bit more to grow corn and grain sorghum.”
Guidry showed the crowd a supply and demand table for corn using January numbers. “There was a pretty good corn yield across the nation last year. 2005 started with expectations the corn and soybean yields would be substantially lower than trend. There were dry pockets in the eastern portion of the Midwest. Even with that, we ended up with a crop of about 148 bushels per acre. The resulting large crop certainly didn't help to improve our burdensome supply situation.”
The positive with the current market is demand. In one month, feed use increased by 125 million bushels. “That's a good showing.”
Unfortunately, the current carryout is about 2.4 billion bushels. “That's a large carryout to carry into 2006. The average price for the 2005-06 marketing year was down to about $1.90.”
Guidry does see some positives with the coming corn crop. Most analysts, including Guidry, believe the nation will see a reduction in corn acreage because of the high fuel and fertilizer prices.
“I think we could see some additional strength in demand for the remainder of this marketing year. That would help reduce the 2.4 billion bushels.”
The economist also expects ethanol demand to remain solid. “The sentiment in D.C. is to wean ourselves off oil, so the prospect of continued ethanol/corn use is there. We should see continued growth (in ethanol).”
Citing week-old export figures, Guidry said the United States is about 1.6 percent behind a year earlier. “We've pretty much caught up and exports are on target through this part of the marketing year.
“I looked through the first 21 weeks of the marketing year for corn to see how much, on average, we're exporting each week. Those numbers show we're currently doing a bit better than the five-year average.”
Looking at the remainder of the marketing year, the numbers show 2003-04 had a strong year's end at 35 million bushels. “On average, we export about 33 million bushels weekly.”
So, if U.S. exports continue at current levels for the remainder of the marketing year what would supply look like? “If we use the 2003-04 rate, we need to increase our current estimate by about 85 million bushels. Actually, if you adjust last week's good export numbers and project out for the remainder of the marketing year, we may be closer to 100 million bushels in exceeding our current export estimate. The point I'm making is exports have been very strong and there are signals that we'll do a little better than current USDA estimates. That should help us whittle away at the ending stocks number.”
The world corn situation is relatively positive. In 2004-05, a big corn production year, there was an increase in total world corn stocks, the first time in five or six years that happened.
“In 2005-06, that number will be brought back and we're looking at a stocks-to-use ratio of about 16 percent. That's still high but not nearly as high as we were 10 or 15 years ago.”
Should there be weather difficulties, either in the United States or some other major farming nation, prices should react strongly.
“The flip-side to my belief that exports will do better than USDA numbers (comes when considering) our major competitors in exporting corn — China and Argentina. In 2005-06, both are expected to have relatively significant reductions in corn exports. Most of that is because they'll not produce as much corn.”
With less competition, Guidry said, the United States should be able to get a little better foothold in the export market.
Despite the bearish numbers, corn futures prices have been in an upward trend.
“Go figure. Over the last month, there's been a strong move up in 2006 corn futures. Much of that is being driven by speculative funds. The same money could be buying other commodities like gold and silver. However, those are expensive while agriculture commodities are a cheap ‘in’ for the speculators. That's why corn prices have been ratcheted up recently, more than supply and demand numbers dictate.”
The problem is while speculators can drive price up, they often get in and out of markets very quickly. “So we could see (prices) turn around in a big hurry.
“September 2006 corn is at nearly $2.50 per bushel. December corn is nearly $2.60 per bushel. Current prices, in view of supply and demand, are positive.”
Could the current price strength continue through harvest? “Probably not if we have normal weather. We're still facing a 2.4 billion-bushel carryout.”
Most believe U.S. corn acres will drop this growing season. Guidry looked at three acreage scenarios for the 2006 crop: 82 million acres (about what was planted in the United States last year); 81 million acres; and 80 million acres.
“I guess we'll be close to 81 million acres. I don't think we'll have a huge change in corn acres. The Midwest seems to be more rigid in making wholesale change to enterprise mix.”
Assuming 81 million acres, an average yield and strong demand for the 2006 crop, the ending stock number would be taken down to 2.1 billion bushels. “So even though the reduced acres will help, we'll still face a 2 billion-bushel carryover.”
What could that mean for price?
“I went back to 1980 and looked at ending stock levels and average prices…Where we are currently, 2.4 billion bushels, we've also been four times and prices are typically around $2.10. Projecting with reduced acres, we'll still be in the $2.10 to $2.15 range. The current price is $2.48 and we could be heading toward $2.10. Given supply and demand, current prices are at a premium.”
Given that it is likely corn prices will move down, a pre-harvest marketing would seem to work best. “I went back five years to see what the futures prices were (mid-month from April through August) to see the difference between pre-harvest and at-harvest strategies. Out of the last five years, waiting to sell at harvest generated the highest return only one year. And that year we had much lower yields than expected.”
The rest of years saw the highest prices in April, May or June.
“2006 seems to be setting up to see the highest corn prices sometime in the spring…Producers need to be a little more aggressive with their marketing this year. Without a major weather problem, we'll be looking at prices in the low $2 range.”