Today's feature from the LDN Spring FARM OUTLOOK

Corn: When a good harvest may not be so good

By Derek Hurley

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[April 01, 2014]  For the last few years, farmers in Illinois have enjoyed above-average returns on their corn crop. Years prior to the harvest of 2013 were influenced by high demand for a higher-quality crop, which was harder to find after the 2012 drought.

According to John Fulton, county director for University of Illinois Extension, there were likely several factors that went into the price changes prior to 2006.

"Use in fuel blends (ethanol and biodiesel), food products, exports and domestic livestock feeds are the large consumption areas," Fulton said. "The export markets are usually only two or three years in length, and the last boom was in the late 70s, and the steep price decline led to significantly smaller incomes for producers."

Beginning in late 2006, crop prices entered what some called a "new era" of higher values, partially due to the increased demand for crops in the production of ethanol and other similar biofuels. Fulton says that the fuel blending led to an increased use of domestic crops by U.S. producers, whereas past years saw a greater trend in exporting crops.

After the growing season of 2013, many farmers were happy to find a much larger yield than they had in the past. Last summer, projected corn prices hovered at around $7 a bushel. By all accounts, there was the potential for a great profit this year.

As 2013 moved forward, the projected price of corn dropped considerably. As of February this year, corn prices in Illinois have been hovering somewhere between $4 and $4.50, depending on where you look.

The question that has arisen for farmers now is this: How do I recover? What do I do now? The answer given by agricultural experts is to try to break even this year.

According to Gary Schnitkey of the University of Illinois Agricultural Department, cash grain bids for 2013 fall delivery are $4.40 per bushel. This is below the projected 2013 break-even level of $4.65 per bushel. Cash bids for 2014 fall delivery are near $4.35 per bushel, near the $4.31 level needed to break even. However, the potential for low prices to continue over the next few years could lead to losses.

The break-even rate has steadily increased since 2004. At that time, break-even prices averaged $1.67 per bushel. Between 2004 and 2013, break-even prices increased each year: $1.98 in 2005, $2.40 in 2006, $2.54 in 2007, $2.88 in 2008, $3.59 in 2009, $3.69 in 2010, $4.18 in 2012, $4.19 in 2012 and $4.65 in 2013. The increase in this dollar amount can be attributed to both increased non-land costs and increased cash rent.

According to data provided by the University of Illinois, this era of pricing has been marked by an interesting pattern. Corn and soybean prices have likely finished what have been, by historical standards, very long runs of above-average prices. In addition, it is unlikely that such prices will return in the near future. However, the same data shows that it is also atypical for a long run of above-average prices to be followed by a long run of below-average prices. It is more likely that any resulting trend of low prices will be shorter than the preceding trend of high prices.

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Some believe that the high corn prices since 2006 have stimulated an increase in foreign corn production. The USDA estimates the 2013 foreign production of corn to be 46 percent larger than production in 2006. Based on historical data, corn acreage outside the United States may stabilize following the recent decline in prices, but a substantial reduction in acreage would not be expected. In order for that to happen, foreign markets would have to witness a combination of poor weather and lower yields. A small increase in domestic demand for corn could also be generated by an expansion in broiler and hog production.

The most common reason for potentially higher corn prices next year is the expectation that U.S. producers will trim acreage and production in response to the decline in corn prices.

Overall, it is very likely that the next couple of years will see a decrease in corn prices, with some farmers simply trying to break even. However, all is not lost, and if history does indeed repeat itself, we will likely see another increase in prices, even if the levels are not as high as in recent years.

"There will probably be some cushion, and there already has been in the market we are seeing now," says Fulton.

Any higher corn prices next year and beyond would likely come from a combination of reduced foreign production, smaller U.S. crops and an increased demand for corn. Increased demand, however, does not equate with an increase in consumption associated with lower prices. Increased demand is defined as the willingness of users to consume more corn at a given price, or conversely, to pay higher prices.

Overall, while there may be a few difficult years ahead, it will be a relatively brief moment of financial strain. A run of low prices may very well lead into another period of high prices. The downside is the low likelihood that we will see several years of corn prices at $6 a bushel or higher, as we witnessed in past years in Illinois.


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