Corn market functioning as needed?
URBANA, Ill. -- Corn prices managed a small rally following the U.S. Department of Agriculture's Nov. 8 Crop Production report that contained a corn production forecast that was not quite as large as feared. Since then, however, new lows have bee...
URBANA, Ill. -- Corn prices managed a small rally following the U.S. Department of Agriculture's Nov. 8 Crop Production report that contained a corn production forecast that was not quite as large as feared. Since then, however, new lows have been established and prices are currently only about 10 cents above the pre-report level.
According to Darrel Good, University of Illinois agricultural economist, the recent corn market commentary has been dominated by two themes. One is that USDA's production estimate to be released in January will be larger than the November forecast. The second is that corn consumption for ethanol production will be negatively impacted if the U.S. Environmental Protection Agency's preliminary rule making for the Renewable Fuel Standards for 2014 is actually implemented. Good says both of these expectations are questionable.
"Any change in the January corn production estimate from the November forecast would be the result of a change in either, or both, the estimate of acreage harvested for grain or the U.S. average yield," Good says. "The November National Agricultural Statistics Service planted acreage estimate was fully consistent with USDA's Farm Service Agency report of planted acreage. In the previous 10 years, the January U.S. average yield estimate was above the November yield forecast five times and below the forecast five times.
"Recent history suggests that there is a small probability that the January production estimate this year will be large enough to substantially alter expectations of year-ending stocks," Good says. "The price impact of the production estimate, however, will be co-mingled with the price response to the estimate of Dec. 1, 2013, corn stocks to be released on the same day."
In a preliminary rule making for 2014 announced on Nov. 15, the EPA proposed to effectively reduce the mandate for renewable biofuels (primarily corn-based ethanol) in 2014 from the statutory requirement of 14.4 billion gallons to 13 billion gallons.
"Some have interpreted this to mean that, if implemented, the rules would result in less corn consumption for ethanol production during the current marketing year than would have otherwise occurred," Good says. "That may or may not be the case. Without a change in the rules, blending of ethanol in the domestic motor fuel supply during the 2013 to '14 corn-marketing year would still have been limited by the 10 percent blend wall and consumption of relatively small quantities of higher blends.
"The proposed change in the RFS mandate does not necessarily substantially alter prospects for domestic ethanol consumption during the current corn-marketing year," Good adds. "However, as pointed out two weeks ago, domestic ethanol consumption and production will be influenced by factors beyond the mandate. In particular, consumption will be influenced by the extent to which mandates are met with physical blending versus the use of Renewable Identification Numbers (RINs) stocks. Those decisions will be influenced by the EPA's final 2014 rule making and by the perceived risk that the rules could be successfully challenged in court."
Good says obligated parties may choose to retain RIN inventories until these issues are sorted out.
"Without a meaningful increase in the U.S. production estimate in January, corn prices appear low enough to encourage the increase in consumption made possible by the large 2013 crop. U.S. corn is competitive in the world market, domestic livestock production has been returned to profitability, and ethanol production margins are large," Good says
Editor's note: Levey Larson is a News and Public Affairs specialist with the College of Agricultural, Consumer and Environmental Sciences at the University of Illinois in Urbana.