|By LINDA McGURK
WEST LAFAYETTE, Ind. — The planting season was soggy and mandated replanting in some regions. The harvest was slower than usual and is still trailing behind in the Eastern Cornbelt.
The USDA cut its yield estimate, and the crop year might turn out to be average rather than above normal. But with prices recently reaching a 10-year high, and the escalating demand for ethanol continuing to fuel a bullish market, corn producers don’t have much to complain about.
“This is not a typical price pattern. It’s a particularly difficult market to evaluate,” said Chris Hurt, agricultural economist at Purdue University.
He doesn’t expect prices to go down, but cautioned that the market is volatile, especially if prices push above $3.50.
The buying started unusually early this year, already in mid-September. As the season went on, major buyers became nervous that prices wouldn’t go down, which put pressure on futures and emboldened producers to hold on to their corn, well aware of the increasing demand for ethanol.
Hurt thinks the new electronic trading system for agricultural futures at the Chicago Board of Trade, which now operates side-by-side with the old pit trading, also contributed to the rally.
“That brought in an additional pool of new traders that haven’t traded in corn before. It provided fuel for the fire,” he said.
In its Nov. 9 World Agricultural Supply and Demand Estimates report, USDA forecast a season-average price of $3 per bushel for corn. Based on what producers currently receive, that number is likely to go up. But what is the upside potential? Hard to know, according to Hurt, since the price at some point will force some of the end users to cut back.
“Hog producers are a vulnerable group, since they break even at a cash price of around $3.15. If it goes above $3.50, it would be difficult for them,” Hurt advised. “Ethanol users break even at $4 or higher.”
If estimates in the Nov. 9 USDA grain forecast report hold true, the 2006 U.S. corn production will slip slightly, but yields will increase compared with 2005.
In the report, USDA reduced its corn production forecast to 10.7 billion bushels, down 1 percent from October and 3 percent lower than 2005.
USDA expects yields to average 151.2 bushels per acre, which would be the second highest on record, only topped by 2004 yields. The estimate is 2.3 bushels lower than last month, but 3.3 bushels higher than in 2005.
“The yield reduction was the biggest thing to highlight in the report. The other changes weren’t really surprising,” said Hurt, adding that the most significant changes were to be found in the “I-states,” Indiana, Illinois and Iowa.
USDA also said the corn harvest was slower than normal this year, despite the fact that the crop developed and matured faster than usual. As of Nov. 6, 81 percent of the entire U.S. corn harvest had been binned, although more than half of the crops were still standing in Michigan and Ohio, and one third was left in Indiana and Wisconsin. The Eastern Cornbelt is expected to have the lowest yields.
“Currently, (Indiana is) running about eight days behind. We had two weeks in October with heavy rains that kept the farmers out of the fields,” said Greg Matli, estimates group leader at Indiana Agricultural Statistics Services.
Southern Indiana is closer to completion than the northern and middle parts of the state, but it’s also the area that has the least acreage.
“We’re behind. But will we get the crops taken out before the end of the year? Yes,” Matli said.
On Nov. 2, corn futures reached a 10-year high, peaking at $3.535 for December delivery, the highest level since August 1996. Now there’s “major uncertainty” for what low and high corn prices are, according to Hurt, who recommended producers to sell frequently, up to 10-15 times, to reduce risk in the demand-driven market.
Next summer, when U.S. farmers will grow an estimated 6-10 million additional acres of corn, will be a critical time period. For bullish producers, the prospect of selling $5 corn is already looming, and Hurt said that is not an outlandish idea.
“If there are difficulties with the weather, look up. The sky is the limit,” Hurt said.
This farm news was published in the Nov. 15, 2006 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.