Before we contemplate business, let us first contemplate freedom as we prepare to celebrate the most important day in our nation’s history. Fifty-six visionaries signed the Declaration of Independence 212 years ago today, their names appearing just below this closing line:
“And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.”How many of us would demonstrate such courage and devotion today?
If you haven’t read the Declaration since your school days, take a few minutes on Friday to read it again. You can find it at and a bevy of related information at www.ushistory.org/Declaration/.
Now to business
USDA’s Crop Acreage report, released on Monday, was a pleasant surprise for corn users as the feds estimate that there were 87.33 million acres planted to corn this spring. That was at the top of the range of analysts’ pre-report estimates and 1.67 million acres higher than the average of those pre-report estimates.
Those planted acres could a) exceed expectations, and b) exceed the March 1 planting intentions of 86 million acres by this amount. In a year with a tough planting season, this is a strong testament to the power of economic incentives. Those incentives, of course, grew dramatically after March 1 as corn prices rose relative to soybeans. Though the price ratio changed and there is a very strong history for corn acres to grow, many did not think conditions would allow it this year. Again: It’s amazing how much ground you can cover in a short time with 24-row planters and GPS systems.
We are going to need all of those acres! USDA estimates that 78.94 million acres will be harvested. That is 90.4% of the total, 2% lower than last year and the long-term trend, but only 0.5% lower than the average for 2002-2006. Floods have no doubt hurt the prospects for harvested acres, but the economic incentives to harvest corn are still very strong so we could see this percentage increase if growing conditions are good.
What does this mean for the corn crop and prices? The futures market was decidedly bearish early in the week, losing $0.35 on new crop December corn futures through Tuesday. December corn futures have rebounded the past two days, though, and as of this writing, stand just $0.05 lower than last Friday’s close.
Monday afternoon’s Crop Progress report showed 59% of this crop rated good or excellent. While 2% higher than last week’s number, that figure is still lower than the worst year on record – 2002 (See Figure 1). It appears that the euphoria over more acres has been swamped again by the realization that the needs for corn may outweigh the supply.
Figure 2 shows USDA’s June yield and usage figures and the acreages from last week’s report. This may not be what USDA actually forecasts in the July 11 World Agricultural Supply and Demand estimates, but it should be close. I do not expect USDA to change its yield estimate much if at all before the August reports when they will have objective measurements of plant populations, ear counts, ear length, kernels, etc.
The biggest problem with recent (and I fear future) USDA forecasts is the usage estimates. Note in Figure 2 that USDA is forecasting ethanol usage to increase 33%, while feed and residual declines by 16.3% and exports fall by 18.4%. I’m not comfortable with any of those numbers and here’s why:
- With oil at $140/barrel and gasoline above $4/gal., ethanol prices should be high enough to allow ethanol plants to operate at anything below $8/bu. or so for corn. Iowa State University’s Center for Agricultural and Rural Development (CARD) estimates that the 144 plants currently operating will use 3.225 billion bushels of corn per year and that the 66 plants currently expanding or under construction will use another 1.94 billion bushels per year. If anything over 40% of the new capacity is up and running by the end of 2008, it is very likely that USDA’s 4 billion bushels for ’08-’09 usage is too low.
- The feed and residual estimate of 5.15 billion bushels is 16.3% below last year. The DDGS from additional 1 billion bushels of corn put through distilleries will provide the equivalent of about 280 million bushels of corn, but that would still leave total feeding 11.7% lower than last year. None of the species are either able or likely to cut back that much in one year’s time – unless they are forced to do so because a) they cannot get feed for the critters, or b) feed is so high priced that it makes young animals worthless and causes them to be destroyed.
- An 18.4% reduction of exports is probably the most likely of these numbers to be correct but even that is questionable. China is on the verge of moving from corn exporter to corn importer. The dollar remains weak, which means U.S. grain is a great buy for foreign users. Yes, wheat output is up and the wheat:corn price ratio is low enough that wheat feeding will happen in some places, but will enough feed wheat be available to supplant these exports?
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.