Will corn and soybean prices return to pre-drought levels?
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[December 13, 2012]
URBANA -- In the past five decades, extreme
drought conditions in the United States such as those experienced in
2012 have been followed by generally favorable growing conditions
and yields near trend values. However, current dry soil conditions
in much of the United States and some recent forecasts that drought
conditions could persist well into next year have raised concerns
that such a rebound in yields may not occur in 2013, according to
University of Illinois agricultural economist Darrel Good.
"There is a relatively high probability of large crops,
increasing stocks, and lower corn and soybean prices in the
2013-14 marketing year," Good said. "Such a probability might
warrant some aggressive pricing of next year's production.
However, current tight supplies and production uncertainty are
expected to keep prices relatively high in the early part of the
new year. If that is the case, the spring price guarantees for
crop revenue insurance could once again be at very high levels,
offering protection from low prices that would result from large
crops," he said.
Good said that five or six years ago, the
corn yield discussion was dominated by thoughts that corn yields
were increasing due to new seed technology and that corn yields
were "bulletproof." That discussion seemed to gloss over the
impact of an extended period of very favorable weather.
"The pendulum has now swung in the other direction, with the
current corn yield discussion dominated by the potential of an
extended period of dry weather and sub-par yields," Good said.
"Only time will tell if the concerns are legitimate. For now,
such concerns may motivate another year of large corn acreage. A
return to a near-trend corn yield would then result in a very
large crop in 2013. A large crop along with a plateau in the
amount of corn used in the production of ethanol would result in
a substantial buildup of stocks during the 2013-14 marketing
year and corn prices at or below the levels prior to the drought
Good reported that soybean prices are being supported by a
rapid pace of exports and domestic consumption. However,
prospects are still in place for a record harvest in South
America. "Such a crop, in combination with a rebound in U.S
production in 2013, would likely result in a buildup of stocks
next year and prices at the level of late 2011," he said.
According to Good, March 2013 corn futures dropped below
$5.50 in early May 2012 and were drifting lower when U.S.
drought conditions turned prices higher starting in mid-June.
The price of that contract peaked in early August, just short of
the $8.50 mark. March 2013 soybean futures dropped below $11.50
in December 2011 before South American drought conditions and
then U.S. drought conditions sent that contract above $17.25 by
"Corn prices have declined by more than $1
since the late-summer peak, while soybean prices have declined
by more than $3," Good said. "The general expectation has been
that prices of both commodities would return to pre-drought
levels as early as 2013 as consumption adjusted to the lower
supplies and as production rebounded in both the South America
and the United States. The futures market currently reflects
expectations that corn prices will moderate substantially from
current levels by the fall of 2013 as larger crops are harvested
in Argentina and then in the U.S.," he said.
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Good reported that December 2013 futures, for example, are priced 95
cents below December 2012 futures. The soybean market expects prices
to moderate from current levels by the summer of 2013 as a large
South American crop is harvested. August 2013 futures prices are
nearly 60 cents lower than March 2013 prices. Further price
reductions are expected into the fall of 2013 as a larger U.S. crop
is harvested. November 2013 futures are about 85 cents below the
price of August 2013 futures. Still, the prices of both commodities
for delivery in the 2013-14 marketing year are well above the levels
prior to the drought of 2012.
"Corn prices are being supported at relatively high levels due to
a combination of production uncertainty and uncertainty about
whether the rate of consumption has slowed sufficiently," Good said.
The USDA's December Grain Stocks and Annual Crop Production
reports to be released on Jan. 11 will provide more clarity about
the rate of domestic feed and residual use of corn and the
availability of U.S. corn for the remainder of the current marketing
"Those reports are expected to reveal a high rate of feed and
residual use of corn during the first quarter of the 2012-13
marketing year and a smaller 2012 harvest than previously forecast,"
"Production uncertainty, on the other hand, will persist much
longer. The potential size of the South American crops will be
clearer by February. Current concerns are focused on the impact of
extremely wet conditions in parts of Argentina. Prospects for the
U.S crop will not be cleared up for several months," he said.
[Text from file received from the
University of Illinois College of Agricultural, Consumer and