Supply shocks more likely to bring price spikes than demand increases
As longer days cue the advent of spring and planters are roused from winter slumber, $4 corn is driving decisions for 2014. While farmers focus on prices at the farm gate, the tide is changing across the oceans. Corn production and export competition is heating up, bearing heavy on supply, demand and prices in your back 40.
Even though corn prices are likely to be in the $4 range for the foreseeable future, production problems in the Ukraine and Brazil could spur prices to $7 in a single year and then retreat back to $3.50 to $4.50 in subsequent years, says Frayne Olson, North Dakota State University ag economist.
In light of the new global corn environment, Olson encourages producers to start thinking about marketing more than one crop at a time during price spikes. Production is less consistent in other parts of the world, he adds, so any price spikes in the next few years are more likely to be from supply shocks than demand increases.
"We’re living from crop year to crop year," Olson cautions.
Because of the increased volatility and potential shocks to the global system, Sterling Liddell, Rabobank senior vice president, food and agribusiness research, advises producers to boost working capital levels and not to become overextended on liabilities.
In spite of uncertainty, there’s good news: U.S. corn exports—after falling sharply from 2007 to 2012—are bouncing back quicker than expected. At the same time, even the most optimistic don’t anticipate a return to the halcyon days when the U.S. ruled the export seas unchallenged.
As of mid-February, USDA forecasts that U.S. corn exports will reach 1.6 billion bushels in 2013/14. Long-term projections peg corn prices at sub-$4 per bushel until 2022, with a low of $3.30 per bushel in 2015/16.
The next move. Brian Grete, editor of Pro Farmer, thinks USDA’s export figure might be a little ambitious. He estimates 2013/14 corn exports to reach 1.575 billion bushels. For 2014/15, however, he looks for a 14.3% increase to 1.8 billion bushels.
"The size of the 2014 crop will impact how much is exported, but not as much as supplies and political and economic stability in other exporting countries, such as Ukraine and Argentina," Grete says.
The 2015/16 forecast is more difficult, Grete adds. Even though he expects an additional 5% export increase, with trend-line or better yields, corn prices could be as low as $3 per bushel with two good back-to-back crops.
At that price, new demand would grow corn exports to the 2.2 billion to 2.3 billion bushel level, he says, not quite reaching the 2007/08 levels of more than 2.4 billion bushels, even with excellent crops.
The long-term trend remains "very favorable" in the view of Carl Casale, CEO of CHS Inc. The combination of future income growth and population in developing countries bodes well for U.S. exports, he notes.
"China will be importing a high percentage of its corn," Casale predicts.
- March 2014