What’s Ahead For Crop Prices?

Staying strong, but watch for factors that suggest a waning of fundamental support.

Crop prices shot higher last Friday after USDA forecast tighter grain supplies, a blow to livestock producers but good news for Iowa’s corn and soybean farmers. Prices are continuing strong, as crops bid for acreage this spring.

If there is a threat to crop prices, it may eventually come in the form of some weakness in the U.S. and world economies, says Iowa State University Economist Bruce Babcock. For now, market fundamentals remain strong.

USDA's final crop report for 2007, issued January 11, put U.S. corn production at 13.1 billion bushels, down 1% from the last projection, made in November. It's a record corn crop but there are fears that farmers won't produce enough corn and soybeans this year to keep up with demand for feed, food and fuel production.

"The real shocker on Friday was USDA raising its estimate of how much of the corn crop will be used for livestock feed by 300 million bushels," says Babcock. "As a result USDA lowered its estimate of how much corn will be left over at the end of the current marketing year."

Grain demand continues strong

USDA slashed the amount of corn projected to be left in storage on August 31, 2008 to 1.4 billion bushels, a reduction of 359 million bushels from USDA’s previous forecast for the carryout. Last Friday, December 2008 corn futures traded to $5.13 and November 2008 soybean futures reached a high of $12.45.

The rising price of corn is making it more expensive to feed cattle, hogs and poultry. USDA economists forecast that the average price paid to farmers for their 2007 corn crop will be double what it was for the 2005 harvest.

"Cutting 359 million bushel from the expected carryout next August 31 was a tremendous correction in the numbers," says Babcock. "The natural inclination is when feed prices go up, feed use will go down. But it now looks like demand has been strong enough to keep animal numbers up there higher than USDA economists previously projected."

Corn exports remain high too

Also, corn exports have remained strong. The dollar is still cheap—so even at these high prices corn is still being bought by foreign buyers. "The market is not yet rationing corn like we thought it would," he says.

If you look at the main foreign buyers of U.S. corn and soybeans, their currencies haven’t strengthened as much as the overall trade. Supply and demand are out of balance.

"The rest of the world isn’t responding as much as you’d think they would, to these high prices," he says. "If you are an Iowa livestock producer and you want to see these high prices come down a little bit, your best hope is that the rest of the world gets its act together and starts producing more."

Energy mandates make difference

Another factor is the new energy bill signed into law by President Bush in December. It makes sure demand for corn and soybeans used for fuel will be strong in the future. "There are also biofuel mandates in Argentina, Brazil and the EU,” he says. “And China has put a tax on its grain exports."

So total demand for corn and soybean is increasing, "and we have a very tight supply-demand situation,” says Babcock. “Looking at the fundamentals, with the biofuel expansion, we’ve changed the supply-demand relationship and we’re just not seeing an expansion in grain supply yet."

"But," adds Babcock, "I think over the next two or three years, there will be enough a global incentive to expand feedgrain and oilseed production, and supply-demand will get back into balance."

Clamor for CRP acres expected

USDA officials are already feeling pressure to release land that is in the Conservation Reserve Program. Wouldn’t 2.5 to 5 million acres coming out of the CRP help increase crop supplies? "It would," says Babcock. "The markets are screaming for more planted acreage and the problem is we don’t have it available now in the United States."

So corn is competing with beans and beans are competing with wheat—driving prices higher. It seems the U.S. is the only supplier in the world that can help ease the current tight supply-demand situation for grain. "I think we’ll see more CRP acres move back into row crop production,” says Babcock. "The question is, when will the USDA ag secretary make that decision, and whether or not he will decide to release those CRP acres without penalty."

Ethanol price key to corn price

Futures prices for corn are over $5 a bushel. Will the cash corn price actually be $5 this coming fall? If you can tell Babcock what the price of ethanol will be, he’ll tell you what the price of corn will be.
"Ethanol producers can afford to buy $5 corn if the price of ethanol is above the $2.35 to $2.30 per gallon range," he says. "If the price of crude oil remains around $100 a barrel and the price of gasoline stays high, then $5 is a rational number—assuming we don’t get a huge grain supply response overseas. That is what the world is looking for right now with these high prices—more grain supply."

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