As I write this, there is every indication that corn prices will be headed lower. But by how much and for how long is the big question. Total acreage planted is estimated to be more than 97 million acres, a level not achieved in about 80 years. Add in a growing season where weather was mostly favorable across the U.S. and everything is in place for a downward move.
As is always the case, the key to corn price is the worldwide balance between supply and demand. Over the past year, growers worldwide took notice of the profit potential of corn and, along with U.S. growers, greatly increased their acreage.
When it comes to corn supply, the obvious players are ethanol, feed consumption and the imports/exports comparison. Inventory a year ago was low, and last year’s poor crop did not help the inventory situation. The U.S. made it through because the high prices greatly curtailed usage, just as you would expect. Simply put, high-priced items are rarely wasted and are used wisely.
It is impossible to talk about corn demand and not begin with ethanol. I have never spoken to anyone who seriously believes that governmental regulations requiring ethanol in our fuel will materially change. So the demand for more than five billion bushels — one third of the crop — seems to be safe.
But further growth is in question, because of what has come to be known as the “blend wall.” Seems that when the ethanol law was passed, everyone expected gas usage by Americans to continue to rise. And in 2006 this certainly looked like a sure bet. But then when gas prices spiked, followed by the Great Recession and its job losses, everyone either cut down on their driving or purchased more fuel-efficient vehicles. Since about 2009, the number of gallons of gas used each year has decreased.
At present, 10 percent ethanol is contained in nearly every gallon of gasoline sold. This 10 percent mix is about all the ethanol fully 50 percent of U.S. vehicles can burn. Raise the amount of ethanol and these older vehicles will experience engine damage, damage that will not be covered by vehicle warrantees. If more ethanol is not used in gasoline, where will it go? Clearly this is something all corn growers must watch closely.
Exports of corn and even perhaps ethanol would seem likely, given a lower corn price. But recall that corn growers worldwide have increased plantings and yields. These foreign growers have captured markets. Will U.S. growers be able to get the foreign buyers back? Only time will tell.
Domestic demand will increase as the corn price weakens. But by how much and how fast? The cost of feed the past few years has forced many high volume users, such as feed lots, out of business. Will they or can they come back? Again, only time will tell.
The price of corn has been very difficult for almost every livestock producer, to say nothing of consumers of most everything at the grocery store. Any lowering of prices will surely result in higher usage.
Keys to Watch
The ultimate driver of corn price over the next year will be the national average yield. The markets are currently expecting corn to sell for about $4 per bushel based on about a 150 bushel national average yield. Increase the average yield to 160 bushels and the price moves down $0.50. Decrease the yield to 140 bushels and it moves up a like amount. This makes watching the yield at harvest season the key to what the price will do. There was a mini-drought in late August and early September in the Midwest. How was the crop effected? No one seems to know.
Given that every bushel of average yield is so important, it would be wise for all corn producers to watch harvest numbers carefully before making any marketing decisions.
Editor’s Note: Michael Evanish is the manager of MSC Business Services, a member service of the Pennsylvania Farm Bureau. For more information, call 717-731- 3517.