Can Corn Dip to $3.50?

January 31, 2014 09:00 AM

If weather does an about-face and approaches normal this year throughout the Corn Belt, some believe rising surpluses could send corn prices almost $1 lower from current levels.

"Yes, we are going to $3.50 corn," predicts Dan Basse, president of AgResource Co. Such prices would not exactly be ancient history. "From 2000 to 2005, corn prices were below the cost of production," he says, adding that corn was $3 per bushel as recently as 2009. Basse believes that soybean prices could potentially drop to $9 per bushel.

However, that’s not his worst-case scenario. With normal weather, corn prices by 2015/16 could reach levels as low as $3.25, and with good weather, possibly to $2.75 for a time. But Basse is not all bearish.By 2018/19, he expects corn prices to rebound to current levels, $4.25 to $4.50. The recovery will largely occur because bearish commodity prices will force a 20- to 24-million acre cutback for all crops, not just corn, Basse believes. To bring supply and demand back into balance, the laws of economics suggest that prices — for a time — have to fall below the cost of production.

Other analysts who sat on a Top Producer Seminar panel Jan. 30 with Basse had a different view. "I think $4 per bushel is about the bottom," says Thomas Elam, president of FarmEcon LLC. Elam does not see a major cutback in corn acres in 2014 the way some do — in part because of the 8.3 million prevent plant acres last year and 1.4 million acres in the CRP that is coming back into production.

Basse acknowledges that low corn prices will encourage more use, but with cooperative weather, supply will increase faster than demand. He has two major concerns. One is U.S. export market share, which continues downward. "We have lots of new global capacity, an additional 167 million acres," he says.

Equally sobering is that while U.S. producers are impressively efficient by any measure, the U.S. is no longer the world’s lowest cost corn producer, Basse says. Despite political problems, Ukraine holds that spot with production costs averaging about $2.40 per bushel, Basse estimates.
It’s not that farmers in Ukraine are managing costs and inputs better, but that they have far lower land costs. Land is about 50% of total costs. "We are a high cost producer," Basse states. Variable costs, however, are similar in the U.S., Ukraine and Brazil.

The potential that crop prices could see further erosion is reduction in land values of 5% in some regions to as much as 35% in others, Basse predicts. He sees the upper end of land price corrections in the northern and western fringes of the Corn Belt and the western plains. Basse does not look for a crash in values anytime soon, however, forecasting a modest 2% to 5% decrease by next January.

Another factor making Basse more bearish on corn prices catching fire is not just supply and demand but the exit of funds in commodity markets. "The hot money is no longer in our space," he says. "You need the hot money" for markets to move sharply higher.

While ethanol use likely will remain at current levels, he does not see growth here or in most other countries. "Ethanol is no longer the favorite son" of lawmakers, he says. Reasons for that include massive lobbying by oil companies to try and block further increases in ethanol use and equally important, the U.S. has dramatically increased energy production to the point that energy self-sufficiency is within reach, some say.

All this said, Basse and others look for corn ethanol demand to be somewhere between 4.7 and 5 billion bushels — still huge. On the bright side, Basse sees reason to be optimistic on the future of ethanol exports.

If Basse is right, new corn demand will have to come from two sources: exports and increases in meat consumption. Elam is optimistic that global meat demand will continue to increase, boosting U.S. meat exports that have spiked higher in recent years. He is less sanguine about increases in U.S. meat consumption, because of weak economic performance.

"Per capita meat consumption is below 2007 levels," Elam says, noting that’s primarily due to the effective unemployment rates, which is not 6.7% but 13.5% — factoring in those who are underemployed and others who have stopped looking for work. Meat prices also are at high levels. "Price changes peoples’ behavior," he says.

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