Corn is the staple crop of the U.S. Ask any Midwestern farmer what their most profitable crop is, and most likely their answer will be corn. Grain prices affect the amount of acres of a certain crop that are planted by farmers, as some recent developments could change corn prices and the amount of acres planted in the near future. One of the developments is increasing U.S. exports of corn, which may have a significant effect on future corn prices. When corn prices increase, many other asset values that are dependent of corn prices, such as farmland, ethanol or other grains, will be affected too.
Current Corn Prices
Since the USDA released the January World Agricultural Supply and Demand Estimates (WASDE) report, corn prices have been volatile. In just two weeks after the January WASDE was released, corn prices decreased 16%. The bearish report stated that U.S. corn yields were at a record level in 2009, at 165.2 bushels per acre, breaking 2001’s previous record by almost 3%. This record yield was hard to comprehend for many analysts since the fall harvest had been one of wettest and coldest on record, not to mention the large amount of corn still standing in fields as of the report date in January.
Besides the bearish WASDE report in January, corn prices declined even more when corn importers were purchasing their corn elsewhere due to the rising U.S. dollar. Add 88.9 million planned planted acres in 2010 estimated by the USDA, and corn prices didn’t have much of a chance to make a much needed rally.
The weather so far this spring has turned out to be nearly perfect for corn planters across the Corn Belt, and of course the corn markets have taken notice. Corn prices hit almost a three week low on April 27th, according to Bloomberg, due to the favorable planting conditions. As of May 3, 68% of the U.S. corn crop had already been planted when the five-year historical average is only 40%, according to the USDA’s weekly planting progress report.
With nearly all the factors stacked against an increase in corn prices, importers made a move. In late April, the USDA announced that China purchased 115,000 tons of corn due for August delivery while many analysts believe that a recent purchase of 240,000 tons by an unknown buyer might have been China as well, according to Bloomberg. The surprising increase in U.S. corn exports immediately improved corn prices by nearly 3% in one day.
China purchased the U.S. corn in order to relieve their domestic corn prices, which were 74 cents per bushel more than U.S., according to a state-owned market research center in Beijing. Another factor behind the Chinese purchase has to do with demand.
China’s corn production decreased by 13% to a four-year low last year because of drought, according to Bloomberg. Other reports forecast China’s current drought to decrease corn production in 2010 by more than 1%, according to Bloomberg. Just on May 5th, Yu Xiaomeng of Bijing’s Shennong Net said that China only has about 13 million tons of corn on hand. China is selling their current inventories of corn, creating a situation where they may be purchasing large quantities to replenish their shortage.
If China purchases as much as 500,000 tons of corn, it would make them a net importer of corn, even though they are the world’s second largest producer or corn behind the U.S. “Demand is expanding faster than production,” Jay O’Neil from the International Grains Program at Kansas State University said in a recent Bloomberg Businessweek article, “China will become a net importer. That’s already a foregone conclusion.”
Agricultural processor Bunge Ltd expects China to become a small net importer of corn in the mid- to long-term as the country's rising demand for meat will increase its demand for animal feed, Bunge Chief
Executive Alberto Weisser said, according to Reuters.
Future Corn Prices
The growing demand for corn is inevitable. The increasing global population will call for an increased demand for corn. Populations in Asia, including China and India, are changing from a grain based diet to a protein based diet. Since one pound of meat requires 7 to 14 pounds of grain, the demand for grains, including corn, will grow at an increased rate.
The price of corn should climb, according to futures contracts on the Chicago Board of Trade. May 2011 corn has been trading more than 12% higher than May 2010 contracts.
Effects of increased corn prices
Grain prices affect many sectors including farmland, food, and ethanol. While the demand for corn will continue to grow, the affects of an increased demand will eventually span out to almost every sector. When corn prices increase, it immediately affects agriculture and food. Food prices will increase and so will many of the input costs of growing the corn. One of the most important inputs of growing corn is the land itself.
U.S. farmland is a commodity that is will have a difficult time trying to meet a growing demand since its supply is shrinking. The U.S. has lost 13,773,400 acres of prime farmland from just 1982 to 2007 alone, according to the American Farmland Trust. There is a complex equation that determines farmland values, and although no one knows exactly what it all includes, we know that grain prices are one of the major factors. When corn prices increase, farmland prices will also eventually increase because farmers will be able to produce more income from the land. Over time, the demand for corn will continually rise, and if yields are not able to catch up, then farmland values should increase due to the increase of demand for land.
Farmland values have been steadily increasing for over a century. For twenty years prior to 2008, farmland has appreciated 6.7%, and over the past 100 years it has appreciated 4.5%, according to USDA statistics. Cash rents on farmland can typically be found as a percent of the farmland’s value. If farmland values increase, so will the cash rents.
Food prices will also increase if there is an increase in grain prices, particularly corn prices. Even gasoline prices should increase since at least 10% of all U.S. gasoline is comprised of ethanol, which is primarily made from corn.
Current corn prices are pricing in a bumper crop, considering the favorable weather and early start farmers received to the planting season. The single most important event that may offset these bearish factors to corn prices is demand. If or when China, or any other country, purchases more corn from the U.S., domestic corn prices will increase.
Investing in corn could prove to be a smart investment, but investing in farmland may be safer since it has proven to be a much less volatile investment over past years. Over the long-term, demand for corn should outpace any increase of supply in corn, which will create a bumper outlook for corn prices.
Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.