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"If a train wreck is anticipated far enough in advance, it can
be avoided," said Darrel Good, responding to those who have
argued that extremely high prices for corn will be required to
get the necessary increase in corn acreage next year, resulting
in a train wreck involving shortages of corn and record-high
prices. Good's comments came as he reviewed recent corn
prices.
"Budgets for soybean production costs and for costs of
producing corn after corn in the Midwest do not support what
might be termed the 'train wreck' view," said Good. "The
economics of producing corn after corn rather than soybeans
depends on the relative price and yield of the two crops and the
difference in costs per acre.
"Over a wide range of yield ratios and soybean price levels,
the break-even price level for producing corn after corn rather
than soybeans ranges from about $2.40 to near $3. The market is
likely to give producers the necessary incentive to increase
corn acreage."
Corn prices declined sharply following the USDA's August Crop
Production report and remained soft last week. September and
December 2006 futures contracts established new lows, and cash
prices continue to reflect a weak basis.
December 2006 futures traded to a contract low of $2.335
following the USDA's report of production potential near 11
billion bushels. The average spot cash price in central Illinois
declined 15.5 cents in the week after the report and was 48
cents below the marketing-year high reached on July 12.
The marketing loan gain rate was 6 cents on Aug. 21. The
average harvest delivery bid in central Illinois stood at $2.015
on Aug. 18, very near the Commodity Credit Corporation loan
rate.
"In five of the past six marketing years, the lowest cash
price in central Illinois was reached in the harvest period --
September, October, or November," said Good. "The lows ranged
from $1.57 in 2000 to $2 in 2003. The past two years, the lows
were at $1.635 and $1.695, respectively.
"A harvest low is expected again this year, but not as low as
in 2004 or 2005 unless the crop is larger than currently
forecast."
Good said that the short-term prospects for corn prices will
be determined largely by crop size and the demand for storage.
"With harvest prices at or below the loan rate, and a lot of
optimism about corn demand in the year ahead, producers will
likely store as much of the crop as possible," said Good. "The
size of the crop will influence how much corn may have to be
moved at harvest time and therefore the magnitude of the basis.
[to top of second column] |
 "Opinion about crop size remains divided, with the focus
primarily on whether late-season heat may have reduced yield
potential. Crop condition reports will not shed much light on that
issue, so the market will have to wait on the September production
forecast."
Good said that the magnitude of a post-harvest recovery in cash
prices will be initially determined by the strength of demand. All
indications are that demand will be very strong and will push total
consumption of U.S. corn over 11.8 billion bushels during the
2006-07 marketing year.
"In the past, when large crops have resulted in harvest-time
price lows, the marketing-year high cash price has tended to occur
in the following spring or summer," Good noted. "Over the past 24
years, the lowest cash price in central Illinois occurred at harvest
time 13 times. The high price in those years occurred in the
following summer 11 times. The high occurred in December one time
and in April one time."
For those 13 years, the range from low price to high price ranged
from 44.5 cents in 1990-91 to $2.525 in 1995-96, and the average was
90.5 cents. Excluding 1995-96, the average was 77 cents.
July 2007 futures settled at $2.68 on Aug. 18, 32.25 cents above
December 2006 futures. Depending on basis levels in 2007, the market
is currently projecting about a 50-cent increase in spot cash prices
from harvest to the spring and summer of 2007.
"Beyond current demand, corn prices will ultimately be influenced
by the size of the 2007 crop," said Good. "With prospects for
declining stocks and continued increases in corn exports and the
amount of corn used for ethanol production, some increase in corn
acreage will probably be required in 2007.
"The magnitude of the required increase will be influenced by
prospects of 2006-07 marketing-year ending stocks as well as
consumption prospects. Corn prices will have to be high enough
relative to the price of other crops, particularly soybeans, to
motivate increased plantings."
December 2007 futures settled at $2.84.5 on Aug. 18, nearly 50
cents higher than the price of December 2006 futures. November 2007
soybean futures settled at $6.1675, 56 cents above November 2006
futures.
"The market is giving the nod to more corn acres in 2007," said
Good. "That incentive will have to persist into the spring of 2007."
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]
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