Corn prices: The unfortunate kernels of truth

Talk to growers in Ontario and Quebec where "Corn is King" and there is considerable optimism. Corn prices are riding a wave of consistency unlike any other time, and suggestions from other parts of the world indicate this wave may last a long time.

On a continental basis, the U.S. ethanol industry has been both celebrated and singled-out for creating more demand for corn. Since 2007, that figure has increased, year-by-year, to the point where corn for ethanol now makes up roughly 40 per cent of the total U.S. crop.

Add to that the fanfare created in 2011 when it became widely known that China’s pork industry was moving toward a more sophisticated production system. Then factor in the weather story from earlier in the South American growing season, where dry weather in December and January sparked forecasts of a 280 million-bushel decrease in corn production from Argentina and Brazil. All of these factors have resulted in strong corn prices since December 2011, with many believing the trend will continue.

Cal Whewell is not one of those believers. A commodities broker from FC Stone in Bowling Green, Ohio, he speaks regularly at functions in Ontario and agrees there is a lot of optimism wrapped up in the short-term picture for corn. However, as he often reminds his audience, "the cure for high prices… is high prices."

In Whewell’s view, the market is always very efficient at either rationing demand when prices are high or fuelling demand when supplies start to cut a little too close for comfort. And he believes growers are seeing signs of that, in spite of relatively high prices for corn, soybeans and wheat.

"If everything is normal, as the (U.S. Department of Agriculture) tells us it could be, our carryout projection at the November (2012) crop report, could well be over 1.6 billion bushels, or double what it is today" at 801 million bushels, he explained.

Some interesting numbers may impact on corn’s pricing structure as the growing season unfolds. For instance, in the post-ethanol boom, there have been years where the corn carryout, the number that best defines or influences crop pricing, was in the 1.6 billion- to 1.7 billion-bushel range. During those years, the price of corn on the futures market traded in the $3.25 to $4.25 per bushel range.

Keeping in mind that almost all of the corn planting has yet to be done — current reports from the University of Illinois only cite "early spring fieldwork" — there is still a lot left to chance for the next eight months.

"If you assume normal, and you assume that corn is the driver of the whole marketplace, and we get to a comfortable 1.6 billion-bushel corn carryout in the fall, you can see corn lose half of its value today, in the futures market," said Whewell.
"Now, is 1.6 billion bushels realized? I don’t know what the weather’s going to do. Who knows whether that potential is there? The USDA, in their numbers, did use a 164 (bushel-per-acre) yield, which is very optimistic. I would use 160 in my examples, and we have grown 164 once."

So it is possible for U.S. corn growers to hit that 164-yield level, particularly with an early planting window. In a March 19 report from the University of Illinois, economist Darrel Good notes extremely early planting of corn can have a slight negative impact on yield, while an early to normal start can help boost yields.

Size also matters

Another consideration on just how large this crop could be comes in the USDA planting estimate for corn. Using the department’s latest figures, U.S. growers are forecast to plant 94 million acres of corn in 2012. Although he questions average yield estimates as too high, Whewell firmly believes the planted acres forecast could be too low.

In a normal planting season, the U.S. typically leaves two to three million acres unplanted; for whatever reason — weather, timing — those acres remain unplanted. In 2011, U.S. growers planted 92 million acres of corn (and harvested 84 million), yet there were 10 million acres that went unplanted, largely because it was too wet in many parts of North Dakota, South Dakota, Minnesota, Indiana, Ohio and Michigan. But coming out of a warmer, drier winter across much of the U.S. Great Plains and Midwest, moisture maps indicate very low levels heading into spring planting. Contrary to any concerns of not being able to "plant to moisture," the lack of precipitation actually has growers thinking in terms of greater opportunity, not less.

"So the first thing that’s going to happen with those drier maps is that we’re probably going to have a very aggressive spring planting season," Whewell said, referring to the activity that’s likely to start in the next week to 10 days. "Of the 10 million acres, let’s say four million acres don’t get planted; that’s six million acres that we can pick up that we were going to plant last year that we didn’t plant."

As Whewell looks at the Corn Belt in Ohio, Michigan, Indiana, Illinois, Iowa, Minnesota, Wisconsin, Nebraska and South Dakota — the largest corn-producing states in the U.S. — he also notes there were 1.2 million acres of winter wheat that weren’t planted last fall.

"I look at 94 million acres, and I think that’s a very conservative acreage number, and I think we can plant 95 million acres of corn, this year," he states. "Even if the yield at 164 isn’t realized, if I plant another million acres of corn, now I can push my yield off a couple of bushels an acre and still be there. I can give you lots of ways to get to 1.6 billion, and not have a 164-bushel yield."

The USDA also bumped its estimates for exports by 200 million bushels. Then again, Whewell repeats himself several times: a lot of things have to happen between now and November.

There’s one scenario that doesn’t get much play in the media on either side of the border: What happens if the average yield isn’t 160 but 145? That was a question posed by seed company representatives attending the recent Western Fair Farm Show in London, Ont.

Obviously, less corn means more demand which boosts the price. But the focus of much of the industry, including those of brokers and USDA in the past two months, has been on what will happen with a 164-bu./ac. average yield. And Whewell notes the difference in attitude where the market is now concerned. Given the expectation wrought by the USDA estimates, it stands to reason that the price should be falling. But it isn’t; in fact, he said, it’s now operating with a premium that is, in effect, preloaded, with the chance to lose, but only if a 1.6 billion-bushel carryout is eventually realized.

"I’ll be the first one to tell you, I don’t know if our corn carryout’s going to be 1.6 billion — and the marketplace doesn’t know either," he said. "And that’s why it has a $2 premium."

Right now, Whewell contended, the marketplace is set to reward growers for sticking to rotations, not going with corn-on-corn or continuous corn.

The wildcards

With any growing season, the weather is the most important wildcard in determining price. Yet in a close second, the impact of China cannot be dismissed easily. Again, the expectation that rapid growth and industrialization of its livestock sector will push corn prices higher for years to come is not entirely based on fact or the prospect of what Chinese agriculture can do.

If measuring demand for exports was based solely on the current average yield for corn in China, then a long-term higher stable price for corn would be expected. But a quick check of average yield in China, relative to the U.S., shows that China’s yield is now at the same point where the U.S. was 40 years ago. To assume the Chinese will stay at that level, in the face of increasing demand for corn from its livestock sector, is just not reasonable.

According to a 2011 report citing figures from the U.S. Grains Council (USGC), China harvested 76 million acres of corn, compared to 81.5 million by the U.S. Despite a six per cent discrepancy in harvested acres, the U.S. yield was still nearly double that of China (12.5 billion bushels versus 6.6 billion).

Chinese farmers still use older hybrids which are single-cross. As well, their planting densities are much lower (23,000 plants per acre versus 30,000 in the U.S.). Plus, as much as 80 per cent of the corn in China is harvested by hand.

"If they can take their corn production from 90 bushels per acre to 115, how much corn do they have to import at that point?" Whewell asks, adding that he doesn’t subscribe to the same notion in corn as what has transpired in soybeans in China. "I think they’ve actually said, ‘We can’t grow soybeans but the rest of these countries can grow soybeans much better than we can, so why don’t we just let them grow soybeans?’"

That is not to say that there won’t be years when China has a problem with its corn crop, and subsequently boosts its corn imports. But given the country’s population base and the relative speed of industrialization in whatever sector it chooses, it stands to reason that the prospect of increased corn exports is not a long-term trend U.S. or Canadian growers can bank on.

"If I assume normal, I assume they steadily increase their corn yields and make a leap," says Whewell. "And if you start investing in technology and you industrialize that production, they can go from 90 bushels an acre to 115 to 120 — and if they do that, where does that take us (in North America)?"

– Ralph Pearce is a field editor for Country Guide at St. Marys, Ont.