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"Stressful weather and declining crop condition ratings will
likely continue to push prices higher even though current prices
already reflect significant yield loss," said Darrel Good. "The
contract high for December 2005 corn futures is $2.885. Prices
above that level are not expected unless the 2005 crop is small
enough to require a reduction in use. "A yield less than 127
bushels per acre would be required to force a reduction in
consumption from the current record level. It still appears that
prices are likely to reach the highest level prior to harvest."
Good's comments came as he reviewed the corn market. Prior to
last week, corn prices had shown only modest response to
concerns about the 2005 U.S. crop. Increased acreage and
adequate old-crop supplies tended to keep prices in check. Last
week, however, prices moved up sharply in response to forecasts
of increasing stress on the western Corn Belt crop.
"While portions of the eastern Corn Belt received significant
precipitation from Hurricane Dennis, large areas of excessive
dryness persist," said Good. "Above-normal temperatures are
expected to persist through the end of the month, with the
National Weather Service also forecasting below-normal levels of
precipitation for most growing areas.
"It is not clear how well the crop will recover in areas that
received measurable precipitation, and the forecast weather
would continue to stress the crop during pollination and kernel
development."
Good noted that the National Weather Service forecast for
August shows odds of normal temperatures in most of the
production region, with below-normal temperatures forecast for
the upper Plains and upper Midwest states. August precipitation
is expected to be above normal in the western Corn Belt and at
normal levels in the eastern portion.
"Forecast conditions would be favorable for the development
of the corn crop, but precipitation forecasts have not been
especially reliable this year," said Good. "Even if the forecast
is correct, the market is focused on potential crop damage over
the next two weeks."
Based on a trend yield of 145 bushels, the 2005 U.S. corn
crop would be near 10.8 billion bushels. If consumption remains
large, near 10.7 billion bushels, U.S. corn inventories would
grow by about 100 million bushels by the end of the 2005-06
marketing year.
"Under that scenario, the USDA sees a 2005-06 average farm
price between $1.70 and $2.10," said Good. "Models based on the
relationship between average price and end-of- the-year
stocks-to-use ratio project a 2005-06 marketing-year average
price between $1.85 and $2.25, if the crop is near 10.8 billion
and use is near 10.7 billion.
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"The fit between the average price and the level of year-ending
stocks is not perfect. In addition, the USDA obviously considers
that relationship when making price projections. The 15-cents-lower
price projection by the USDA reflects consideration of other factors
and the judgment of the analysts."
December 2005 corn futures closed at $2.68 on July 15 and traded
as high as $2.73 in the overnight session of July 17. At the
settlement prices of July 15, the futures market reflected a 2005-06
marketing-year average farm price near $2.55. That calculation is
made using a three-year average basis estimate and a forecast of the
monthly distribution of sales (September 2005 through August 2006)
based on the five-year average distribution.
"Unless the market believes that the use of U.S. corn will exceed
10.7 billion bushels during the year ahead, an average yield well
below trend value is being reflected in the futures market," said
Good. "Based on the uncertain relationship between year-ending
stocks and price, it is calculated that the market is currently
trading a 2005 average yield between 127 and 130 bushels per acre."
Weather conditions and the USDA's weekly crop condition ratings
will be watched closely to judge the yield potential of the year's
crop, Good added.
For the week ended July 10, only 58 percent of the crop was rated
in good or excellent condition. That is below the average rating for
that time of year, and observers reported expectations of further
declines in the condition ratings for the week ended July 17.
"Yield expectations decline by 0.6 to 0.7 bushels per acre for
each percentage point decline in the percent of the crop rated good
or excellent," said Good. "The USDA will release the first forecast
of 2005 yield and production, based on farmer surveys and field
observations, on Aug. 12. That forecast is based on conditions
around the first of August and assumes normal weather conditions for
the remainder of the growing season.
"The market will 'second guess' that forecast, based on actual
weather in the first half of August and weather forecast for the
remainder of the growing season."
Over the past 35 years, Good added, the average difference
between the August forecast of U.S. corn production and the final
estimate released in January after the harvest was 5.2 percent.
"That difference, however, has ranged from less than 1 percent to
nearly 25 percent," said Good.
[News release from the
University of Illinois College
of Agricultural, Consumer and Environmental Sciences]
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