Chip Flory: What Will Make Corn Prices Drop?
Early November corn trade provided a glimpse of what to expect from a post-harvest corn market. Corn futures rolled over and through the bottom of the sideways trading range. But there was no “panic.”
Market-watchers viewed corn price pressure around the November Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports as “expected.”
REFLECT AND SIGNAL
I respect the futures market. I also feel there is just “so much” futures can do to reflect variation in regional supply and demand. Its job is to reflect general conditions and to send signals to producers and end users about how to manage risk.
The cash market typically does the heavy lifting. Regional crop differences and inland waterway transportation issues pushed and pulled harvest basis in a preview of what’s likely to continue into 2023.
Feedlot inventories are tight, and cattle are being marketed at lower weights to lower feed costs. But in November, USDA increased corn feed and residual use 25 million bushels from October, after USDA’s National Ag Statistics Service added 35 million bushels to the 2022 corn crop.
The result was a 10-million-bushel increase in carryover to 1.18 billion bushels. If right, that would be the smallest corn carryover since 2012/13.
The western Corn Belt’s drought this year and the short crop in cattle country made record basis and $9 cash corn bids from feedyards common by mid-November.
The eastern Corn Belt’s growing season was not without challenges, but yields from areas that feed corn down the major waterways to the Gulf for export were generally strong. Illinois’ state average of 215 bu. per acre will be a record for the Corn Belt.
However, low water levels on the Ohio, Illinois and Mississippi rivers during harvest left corn in piles. The impact on the cash market was quick. Record-high barge rates turned good, early harvest basis into bad postharvest bids.
Corn flows to the strongest bid. Western feedlots competed with global exports and Southeastern U.S. hog and poultry markets by bidding east of the Mississippi River for rail shipments. All this happened as ethanol producers focused on profits and pushed production to the highest level since June.
WHAT WILL GIVE?
This action in the corn market suggests something will eventually give. Exports are slow and many believe USDA’s estimate of 2022/23 corn shipments is 200 million to 250 million bushels too high.
Others warn profit margins on ethanol production will drain away. If right, corn at ethanol plants could swamp feedyards.
The market will change – and the cash market will send the signals. Once bushels are reallocated among end users, basis will return to normal levels. That will also trigger the futures market to search for more demand, which is just a nice way of saying “lower prices.”
As Farm Journal Economist and host of the “AgriTalk” radio program, Chip Flory helps farmers understand the markets and seize opportunities.