What happens this fall, when corn from a huge Mid-South harvest starts moving from stalk to storage? Grains analyst Richard Brock sees tightness in transportation and storage and a widening basis.
“The implication to me is that there is going to be a huge shortage of barges, and I think barge freight rates are going to go through the roof,” the president of Brock Associates, told producers at the Mid-South Farm and Gin Show. “A lot of this grain is going to be moved in August and September. Unless there is a drought and a shortage of corn, I think the basis will be awful come this fall.
“If you are going to do something about it, the time is now. I would encourage you to look at the basis, whether you like the price or not, and get it locked up. The situation could just as easily affect the soybean basis as well.”
Brock believes that U.S. corn usage will jump from 11.78 billion bushels in 2006-07 to 12.275 billion bushels in 2007-08, primarily due to ethanol demand, which is expected to jump from 2.225 billion bushels to 3.25 billion bushels.
A corn carryover of 732 million bushels “would give us a 6.2 percent stocks-to-use ratio, which has a price relationship of $3 to $3.30, so relatively speaking, old crop corn is overpriced. The only thing that will change that is if we get into major growing problems this summer. Then old crop will take on the same characteristics as new crop.”
Brock projects corn planted acres within a range of 87 million to 89 million acres. “If it's under 86 million acres, the market is going to be very bullish. If it's 88 million to 89 million acres, we'll look at yield.” (USDA's March 30 Prospective Plantings report has since projected 90.5 million corn acres).
The big question there is the role of corn genetics, according to Brock. “Everybody is assuming that the corn yield is going down because some poorer land will come into production. But I assume that some of that will be offset by improved genetics.
“I've spoken with seed companies who are convinced that the national corn yield in 10 years will be over 300 bushels an acre. That sounds ridiculous, but genetic improvements can be brought to the market five times faster today than five years ago.
“At 89 million planted acres and an average corn yield of 160 bushels per acre, 2007-08 carryover would go from 631 million bushels to 1.5 billion bushels. So even with all these ethanol plants coming on line, we could actually have a huge increase in bushels and the corn market would be in the sewer. Do I think it's going to happen? No.
“If harvested acres come in at 82.1 million acres, an average yield of 154 bushels would produce a crop of 12.6 billion bushels and ending stocks would come in around 800 million bushels.
“So even with a normal crop and huge acreage, carryover still goes up. It's going to be hard to get to a significant bull market if we get that kind of planted acreage. That's why I'm saying our biggest move in the market this year could be a bear market in corn and beans.
“On the other hand, if yields trend downward toward a 146-bushel average, this spring and summer, this market is going to be wild.”
Brock doesn't see a huge break in the corn market until June or July. “The market is extremely overbought, which means for the near term the corn market is going lower. (Corn prices were above $4 a bushel when Brock spoke). Funds are way too long, and we don't have anybody needing to buy corn right now other than livestock operations. Basis levels are going to continue to soften.
“But something will happen and scare the dickens out of us. We haven't had a correction in this market since September.”
While ethanol demand is fueling a bull market for corn, some of the investment in ethanol production appears overly optimistic on profitability, according to Brock
Current ethanol capacity as a percent of each state's corn crop shows that 17.7 percent of the Illinois corn crop goes into ethanol production, compared to 6.1 percent in Indiana, 30 percent in Iowa, 25 percent in Kansas, 9 percent in Kentucky, 20 percent in Michigan, 20 percent in North Dakota and 62 percent in South Dakota.
“There are more ethanol plants than bars in South Dakota,” Brock said.
When you figure in capacity under construction, the percentages rise dramatically. Illinois jumps to 23 percent, Indiana to 32 percent, Kansas to 73 percent, Iowa to 62 percent and South Dakota to 109 percent. “With all the plants on the drawing board in Iowa, the state will be corn deficit within 18 months. We'll have to start shipping corn into Iowa. This is a train wreck waiting to happen.”
Brock added that there are two ethanol plants under construction in New York, “which is already a corn deficit state. Where do they think the corn is going to come from? Do they really think they're going to be able to buy it and get it in there? I personally don't think they will. Some of those plants will have to go out of operation.
“An even bigger problem is that we now have a backlog of at least three years for tanker trucks to haul the ethanol. There's an even longer backlog for tanker cars in the rail industry.”
One reason for the optimism, of course, is that at $2.10 a gallon, the average ethanol breakeven price for corn is about $5.40 a bushel. “That's why they're still ripping and roaring.”
But Brock wonders what happens “if the energy market goes into a long-term downtrend, and gasoline prices go lower to get ethanol prices down to $1.60. All of sudden, the breakeven price is $3 a bushel for corn. The economics of it can change very quickly.”
Another factor is that over the last nine months, construction costs for new ethanol plants have doubled. “A rule of thumb was a cost of $1.10 to $1.20 per gallon. Now it's up to $2.10 a gallon.”
On the positive side are government mandates to make ethanol production profitable for investors. “The farm bill will be strong in terms of biofuel, research and conservation.”
Another positive, the 54-cent tariff on imported ethanol has been extended to January 2009.