Corn ending stocks are at projected at dangerously low levels. Coupled with ongoing drought, scarce stocks could send prices soaring or crashing just as they did in 2008 and 2009, when prices rose to record-highs only to crash following the Great Recession.
In its latest World Supply and Demand Estimates (WASDE), USDA lowered its corn carryout from 647 million bushels in December to 602 million bushels. Balanced against projected corn demand, the new ending stocks figure puts the stocks-to-use ratio for U.S. corn at only 5.3%, well below the historical average of 12 to 13%, and one of the lowest stocks-to-use ratios ever, says Chad Hart, agricultural economist with Iowa State University. Last year’s corn stocks-to-use ratio was 7.9%, and the year before that, the ratio was 8.6%.
The Drought Card
The worrisome thing about having such a low stocks-to-use ratio for corn is that subsoil moisture is short across most of the western Corn Belt, where drought still lingers.
"The potential for price volatility is just as great in 2013 as we saw in 2008," says Hart. "With continued drought we could have record-high corn prices." If drought ends, and the U.S. crop is a bumper, the worry is that corn prices could plunge. "And the threat of recession still hangs over the market as well," he adds.
According to the High Plains Regional Climate Center, drought conditions persist in the portion of the western Corn Belt covered by the center, which includes Nebraska, North and South Dakota, and Kansas. Severe or extreme drought conditions now cover 86% of the region, with moderate drought covering 93%.
On-farm corn stocks have also fallen, according to USDA’s quarterly Grain Stocks report. Corn stored in all positions on December 1, 2012, stood at 8.03 billion bushels, down 17% from a year earlier. Of those stocks, 4.59 billion bushels were stored on farms, a 26% drop from the previous year. Off-farm stocks, at 3.44 billion bushels, were 1% smaller than last year.
The world stocks-to-use ratio at 12.3% is also dropping, down from last year’s 13.5%, according to the latest WASDE report.
"Crop producers don’t need to sell right now and livestock producers don’t need to buy feed or sell animals," says Hart. Livestock producers want to think seriously about putting a ceiling on feed costs, though, and crop producers want to put a floor under prices through the use of options, futures, forward contracts, and other tools.