The March 31 USDA Prospective Planting report sent very bullish signals to the commodity crop markets with an estimate that farmers would plant seven million fewer acres to the four major commodities – corn, soybeans, wheat, and cotton – this spring.
However, many experts point out that A) the number of acres could change dramatically due to both weather and market conditions, and B) acres doesn’t equal yield; fewer acres in an outstanding growing season can out-produce a larger planting in a year with uncooperative weather.
Some analysts see a potential weakening in the corn market – good news for ethanol producers and other consumers of grain – due to a bump in price just as planting is about to get rolling, and the fact that weather conditions may allow for early planting in many parts of the Corn Belt.
Still, most market analysts agree that the logic of farmers planting fewer corn acres than in 2007 and 2008 is irrefutable. Lower commodity prices and higher input costs mean farmers will set aside the marginally productive land. However, most of the reduction estimated by the March 31 report came out of wheat (down seven percent to 56.6 million acres), with corn not buying back as many acres from soybeans as some had thought likely, and beans looking to hold onto and even slightly increase acreage for another record setting soybean planting, according to the USDA.
According to the Prospective Planting report: “Corn growers intend to plant 85.0 million acres of corn for all purposes in 2009, down 1 percent from last year as lower corn prices and unstable input costs are discouraging some growers from planting corn. If realized, this will be the second consecutive year-over-year decrease since 2007 but will still be the third largest acreage since 1949, behind 2007 and 2008. Expected acreage is down from last year in many states; however, producers in the 10 major corn- producing States (Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, Ohio, South Dakota, Wisconsin) collectively intend to plant 66.3 million acres, up slightly from the 66.1 million acres planted last year.”
Al Kluis, the Wayzata, Minnesota-based publisher of the Al Kluis Report thinks the prospective planting report reflects a good approximation of the likely outcome for corn, but he thinks beans and to a lesser extent corn will pick up acreage – maybe as much as two-thirds of the acreage that farmers had planned to sideline.
“Right ahead of the report we came in at 85 million acres (for corn), so we were very close to the USDA figures, but we were about 3 million acres too large on soybeans. It was a larger abandonment than I thought we would see,” Kluis said.
“A lot can change between now and June. I think corn could get as large as 86 million – 1 to 2 million more acres of corn or soybeans or some combination is very realistic. Beans may go as high as 79 to 80 million acres if conditions are just right because there is a tendency for them to find acres between March and June… Prices were 12 dollars a bushel last year for new crop, and now we are looking five or six dollars. Under those conditions, the borderline acres, the fringe that you put fertilizer on last year because you could still make money doing it – this year anything borderline like that you won’t see planted.”
Kluis believes the price bump corn saw after the Prospective Planting report will drive a moderate increase in corn acres.
“We saw a very positive response to the report, an increase of 55 cents per bushel,” Kluis noted. “The market has given back 25 cents since then, but things are still positive.”
Richard Brock thinks more planting will happen, resulting in more crops and lower prices across the board.
“We have forecasts of clearing conditions later in the week, and warming next week – looks good for early planting,” said Brock, based in Milwaukee, who publishes the Brock Report and is a columnist for The Corn and Soybean Digest magazine. “December corn futures closed at a five week low (on April 15) – if we get this crop in, in the next ten days, we’ll see a much larger crop than expected… Our interpretation of the grain market as a whole is everything is heading a lot lower.”
Back to the old model of cheap corn?
Low commodity prices and higher costs for fertilizer, seed, and chemical have caused farmers to put pencil to paper. What had seemed like a historic sea change in the grain complex in 2007 and 2008 now appears to have been a speculators’ spending spree that artificially increased demand.
“Talk about a change in mentality. A year ago people were talking about getting to a hundred million acres (of corn) in the next five years, now they’re thinking that a corn planting in the mid-80s (million acres) would just keep corn in the four dollar (per bushel) range,” said Michael Swanson, senior economist at Wells Fargo Bank in Minneapolis. Swanson believes the actual corn planting (which the USDA verifies at the end of June) will prove to be somewhere between 80 and 85 million acres.
Brock finds himself on the other side from the mass media commodity reports.
“CNBC and MSNBC have really been talking up the idea of inflationary commodity prices and that has held markets up for a while,” Brock said. “The bullish enthusiasm is not going to last. We are still in a deflationary trend. Even the bulls of the energy markets, the ones who are bullish on crude oil are overstating things – in oil – and ethanol will continue to follow gasoline prices. There’s not a lot of downside risk, but not much upside. Oil will hold steady, while all this is going to weigh on the grain market. This could all help the crush spread. Corn will come down more than the energy market – ethanol will follow gas more closely and hold up.”
One of the key issues that’s taking the farmer’s profit out of corn acres are fertilizer prices, driven skyward by last year’s spike in petroleum prices. Prices for fertilizer have come down, but the question about how many farmers are on the hook for the contracts agreed to last year is being hotly debated. No matter the outcome, someone will be unhappy.
“A couple years ago when nitrogen was $175 to $300 a ton, it wasn’t an issue, but in the last year, with the price swinging between $300 and $1200 per ton, a lot of people are stepping back and saying we need more clarity. High price fertilizer and low price corn could mean no money in the field for the farmer,” Swanson said. He noted that buyers and sellers of fertilizer may develop more involved contracts and financial instruments to help offset the risk caused by such a volatile price.
Corn demand from ethanol, and demand for ethanol, find limits
Part of the reason the commodity prices only support a status quo corn planting are the newly recognized limits of the transportation energy market, Swanson believes.
Last year, American drivers rediscovered fuel-efficient vehicles (and many commuters discovered the bus), and they appear unready to return to old-school gas-guzzlers anytime soon, despite the price of gasoline dropping by half in the last 12 months. Swanson points out that fuel efficiency places a cap on ethanol growth where previously many believed the demand growth was unlimited. The other limit placed on ethanol is driving miles. In the last decade, with masses of people building homes in exurban communities, the average annual mileage per driver almost doubled to 15,000 miles a year. Swanson said the average miles driven per driver is not likely to increase from now on.
“At 15,000 miles per year, the driver reaches a physical limit in terms of the amount of time a person can spend driving,” Swanson observed. In his Second Quarter 2009 Row Crops Report, Swanson writes that the discovery of the demand limit set by these two factors – fuel efficiency and driving miles – means “corn ethanol demand is off almost a billion bushels from earlier projections. A billion bushels of corn production requires about 7 million acres of planted corn at the current national yield and historical plant/harvest ratio. So if corn demand doesn’t need these acres, who will pick them up? The economic answer is who ever will pay the highest gross margin per acre.”
The USDA now estimates the ethanol industry will use up 3.6 billion bushels of corn of the existing crop.
As they sit in their planters, it’s a risky moment for corn producers
Climatologist Elwynn Taylor urges corn producers across the central tier of the Corn Belt to wait until April 20 at the earliest to go forward with planting. If a hoped-for warm-up arrives, it will signal an important change in the cooler weather pattern that has gripped the region for the past few weeks.
“Planting early, in cold soil, is no problem if, once the warm up comes, it stays warm,” said Taylor, who serves as an agricultural meteorologist on the faculty of Iowa State University and the Iowa Extension Service. “But when the soil warms up and cools off again a number of times that opens the door to various diseases and also leads to uneven emergence…. folks who start planting this week in Iowa are taking on unnecessary risk.”
Uneven emergence presents a host of agronomic problems when the timing of application of fertilizers and herbicides is critical and geared to the developmental stage of the plant – not to mention the time-critical aspect to maturity in the northern reaches of the Corn Belt.
“I have been observing the beginnings of field work, from Iowa to central Illinois, over to South Dakota and out to the middle of Nebraska, and most of the farmers I talk to – that’s about 300 to 400 folks – they are really keeping their options open. If weather conditions are ideal, they will plant more corn, if not they are not ideal they will cover more beans. I haven’t talked to anyone who has committed to planting more beans than normal, though if we get weather conditions as challenging as they were last spring, then they could change over. But if weather is normal, we should see about a fifty-fifty planting of corn and beans this year.”
One climate indicator Taylor is closely tracking is the Southern Oscillation Index – atmospheric pressure deviations in the South Pacific. When it is higher than usual, the condition is called La Niña, and it correlates strongly with erratic weather across the Midwestern United States.
“If La Niña stays with us, and it’s still there on June 1, then yields will probably stay on the shy side of trend, say 145 bushels per acre,” Taylor said. Iowa Extension Service economist Robert Wisner estimates a low-ball yield like that would result in $5.30 contracts for December corn according to his March 31st posting.
Under normal weather conditions, with La Niña departing, the yield rises to about 155 bushels per acre, which would put December contracts between $4.30 to $4.50 according to Dr. Wisner’s report.
Yield and usage
Kluis is using a trend line yield estimate of 156 bushels per acre, national average. A planting of 86 million acres means farmers would be likely to harvest 78 million acres of corn, which would result in a crop of 12.16 billion bushels. Add that to the carry-in leftover from the existing crop, 1.79 billion bushels, that would mean a total supply of 13.95 billion bushels. A total use of 12.45 billion bushels still leaves a reduced carryout.
“We will need a good yield of corn to avoid having incredibly tight stocks,” Kluis said. We foresee growth in all the areas, but the wild cards are ethanol demand and livestock. I don’t disagree with USDA’s projection of 4.1 billion bushels demand from corn ethanol out of the crop being planted now. Feed demand is holding steady right now (5.3 billion bushels) despite the fact that all sectors of livestock are bleeding red ink. With cattle, hog and dairy prices where they are at – these guys are pretty close to some pretty massive liquidation. Usage could definitely go lower for this marketing year and also next.”
“The stocks-use ratio stays tight unless you start talking about a super yield of 160 bushels per acre or more,” Kluis said. “I hope we have very good weather and very good yields this year. We’re going to need them for the ethanol and livestock industries.”