Corn Rationing Needs to Begin

11:10AM Dec 31, 2010
harvested corn
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The corn market is extremely tight heading into the New Year, and analysts expect short supplies and heavy use to keep upward pressure on corn prices in 2011.    

"The corn market has one job and one job only—to go high enough to make people stop using the product," says Ryan Turner, risk management consultant for FCStone, Kansas City. "We are past the point of encouraging more supply." Turner predicts 2011 corn futures prices will exceed 2008 highs. "I don’t know if it will happen in January or June, but it will happen," he says.
Soaring corn prices will slice into demand, with corn exports expected to fall first followed by feed usage. Analysts anticipate the cattle industry to begin rationing earlier than other livestock sectors due to poor margins, but rationing in poultry, hog, and dairy will be close behind. "It will be very painful," Turner adds.
USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) put the carryout for the 2010-11 U.S. corn crop at 832 million bushels, less than half the previous year’s carryout of 1.7 billion bushels. USDA pegs the average U.S. farm price for the 2010-11 crop at $4.80 to $5.60/bu. World supplies have also tightened: USDA’s latest estimate for world ending stocks for the 2010-11 crop is 130 million metric tons, a nearly 12 percent drop from the previous year’s 147 million metric tons.
Looking ahead to the 2011-12 crop, Chad Hart, agricultural economist with Iowa State University, calculates the full cost to grow corn in Iowa will be $4.25 to $4.50/bu., but revenues will be more than $5/bu., leaving at least a 50-cent-per-bushel margin. "That’s a really good margin, similar to 2007-08, when the first big push in ethanol occurred," says Hart.
Recent extension of the tax credit for ethanol blenders could mean ethanol plants use more of the current corn crop than the 4.8 billion bushels USDA projects. "Everyone in the ethanol production and marketing chain is seeing positive margins," says Hart. Only runaway corn prices coupled with low gasoline prices could slow ethanol production next year, he adds.
The past eight corn crops have been the largest in U.S. history, so the probability that another large crop will be on tap for 2011-12 is high. Assuming a slightly better than trend yield of 162 bu per acre and 91 million acres planted to corn (roughly 3 million acres more than last year), Jim Hilker, agricultural economist with Michigan State University, calculates a 2011-12 corn crop of 13.6 billion bushels.
With current carryover stocks at 6.2% of total use, Hilker says there is no room for error. "If something goes wrong, corn prices will go a lot higher," he says. If growers plant even more acres to corn and yields are above 162 bu per acre, Hilker says, "prices will dip, but they won’t crash."
Tom Grisafi, president of Indiana Grain Company, Valparaiso, Ind., says corn prices need to move well above $6/bu to shake out end users. Yet it is unclear whether end users—who have become accustomed to extreme volatility—will cut back quickly.
"Corn has never traded this high so consistently at this time of year," Grisafi says. The upside price potential for 2011 corn prices is nearly unlimited in his view. "It’s the price that bankrupts the meat and ethanol industries," Grisafi says.