KNOXVILLE, Tenn. -- Corn crop looks good, maybe too good
If the September World Agricultural Supply and Demand Estimates is correct, the 2009 U.S. corn yield will come in at 161.9 bushels per acre, nosing out 2004's 160.3 bushels per acre for a new record. With this level of production and increased demand, the U.S. Department of Agriculture projects ending stocks for the 2009 crop year marginally up from last year. USDA also projects a season average price of $3.05 to $3.65, well below the $4.08 estimated for the 2008 crop year.
That being said, we have to remember that the crop is not in the bin and a lot can happen between the Sept. 11 WASDE estimate and the end of harvest. With recent frost, the yield probably will fall, tightening up stocks and sending prices back up. In that case, recent prices could be the season low.
Prices
Higher prices could put continued pressure on the poultry, livestock and dairy industries. Ethanol plants would feel some price pressure as well.
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On the other hand, the September WASDE production and yield estimates could be right on target or even surpassed by larger numbers when combines transfer corn on-the-stalk into the nation's trucks and wagons. With a large crop, however, the price estimates could be very optimistic.
As traders become accustomed to improved corn genetics and different frost dates, it is not inconceivable that we could see prices in Loan Deficiency Payment territory during this crop year. This is especially true if the planting schedule next spring is closer to the 10-year average and demand expectations turn out to be too optimistic.
A year ago, the talk was about a new price plateau. LDPs for corn and soybeans were thought to be a thing of the past. It was expected that the demand for grains would outpace the supply as the result of worldwide population increases, a growing middle class in developing countries and grain agriculture's trump card -- congressional ethanol mandates.
Some also implied that increased input costs would set a floor on prices -- not exactly grain agriculture's experience during the 1998 to 2001 period when prices were well below the cost of production.
In part, the September WASDE is able to avoid a sizable reduction in its estimate of corn prices for the 2009 crop year by matching the increased production of corn with increased demand, keeping the ending stocks fairly constant. Feed and residual use is up by 50 million bushels from August's estimate and 100 million bushels from the projected 2008 crop year totals.
Demand
With the poultry, livestock and dairy sectors losing money at a rapid rate, it seems unlikely that they will be increasing their demand for corn. This is particularly true given the potential for increased dried distiller's grains with solubles coming from 525 million extra bushels being used in ethanol production.
But maybe livestock's use of grain will not decline as much in the 2009 to '10 crop year as history would suggest. Supply response in the livestock industry is different now than in decades past.
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Years ago, losses in hogs would result in a quick downturn in the hog cycle as farmers culled their herds and took more sows to town or skipped a breeding cycle. The hog cycle as we know it describes the behavior of the market when it was composed of a large number of small producers. Today, the industry is vertically integrated, and the level of investment is significantly higher than it was in the past.
With higher fixed costs, hog producers may find that they will lose less money by continuing production rather than shuttering their barns for a cycle or two. In that way, as the hog industry has become more vertically integrated, it may act more like the crop sector, where high fixed costs result in farmers' planting crops even when the price is below the cost of production. As long as they can cover variable costs, any income in excess of these variable costs can be applied to the fixed costs. One significant difference is crop farmers can choose among a range of crops, while livestock producers have facilities tailored to one species. As a result, they have fewer options.
Wendy Holm describes just that situation in an article "HOGWASH: Straight Talk on Canada's Hog Industry," carried by the Pacific Free Press in Canada. "Canadian hog farmers are now losing an estimated (Canadian) $40 a head on every hog marketed. Many farmers continue to produce because high fixed cost barns made it difficult to cut back. Producers report losses in the range of $15,000 (Canadian) a week."
Editor's Note: Ray is director of the University of Tennessee's Agricultural Policy Analysis Center in Knoxville.
