The USDA’s March 31 Prospective Plantings Report indicates that corn acres will be up three percent (to 88.8 million acres) compared to 2009. Market analysts suggest that this could keep corn prices between $3.00 and $4.50 per bushel and help improve ethanol producers’ margins while also providing reasonable profit margins for corn growers.

Market analysts also point out that corn supply is beginning to catch up with demand. Chris Hurt, Purdue University agricultural economist, says the ethanol industry has a reasonable opportunity to see a better balance of supply and demand of corn in coming years, with prices settling down some from their wild ride between 2007 and 2009.

“This also means corn would have a tendency to find a more narrow trading range with less volatility than the wild ride we just went through,” Hurt says.

The projected corn acreage total was actually 140,000 acres lower than expected, but the stocks report was 190 million bushels higher than expected, says Ray Grabanski, president of Progressive Ag, a marketing and risk management firm in Fargo, North Dakota and a columnist for Agriculture Online. Grabanski predicts a 1.85 billion bushel carryover in 2011, which he says should keep corn prices subdued.

U.S. ending stocks of corn as a percent of use was 11.6 percent at the end of the 2006/07 marketing year. That has increased to 14.7 percent stocks-to-use for the 2009/10 marketing year (the 2009 crop year marketed through August of 2010), Hurt reports. U.S. farmers received an average $3.04 for corn in 2006/07 and $4.20 for 2007/08. The 2008/09 marketing year averaged $4.06.

“USDA is currently estimating that corn growers will receive an average of $3.60 for the 2009/10 marketing year,” Hurt says.

If the March 31 Prospective Plantings Report is accurate with 88.8 million acres of corn being planted, we could expect a 2010 crop of 13.1 billion bushels (figuring the average national yield of 161 bushels per acre). Hurt estimates that 13.2 billion bushels will be consumed so that ending stocks at the end of August 2011 would drop from 1.9 billion to about 1.8 billion.

“This would cause me to raise the expected U.S. farm price received to range from $3.60 to $3.80 for the 20010/11 marketing year,” Hurt says.

Corn acres this year will primarily come at the expense of wheat (down 5.3 million acres to 53.8 million acres or nine percent down from 2009). Grabanski notes that a wet fall in Illinois, Missouri, and Ohio disrupted winter wheat and soybean crop rotations and, therefore, farmers turned to corn.

Also picking up the slack were cotton (up 1.4 million acres) to 10.5 million acres and soybeans (up 650,000 acres) to 78.1 million acres. However, the increase in soybean acres will not be enough to help the biodiesel business, says Richard Brock, president, Brock Associates, a commodity marketing and hedging advice firm based in Milwaukee, Wisconsin. Brock also is a columnist for Corn & Soybean Digest.

Soybean prices will need to be lower (at least $1 per bushel less than the average price in 2009) for at least six months before biodiesel producers would use soybeans as a steady feedstock, Brock says. While there still are 4.5 months to go in the 09/10 marketing season, the average price of soybeans should be approximately $9.40. They averaged $9.97 in 2008/09.

Grabanski agrees that biodiesel producers need steady supplies of soybeans at prices where they can turn a profit. He adds that an increase of 650,000 acres of soybeans this year is important considering that South America could harvest a bumper crop this year due to good weather conditions. U.S. supplies might keep soybean prices in the $8-$11/bushel range this year, he says.

At this writing in mid-April, much of the Corn Belt was experiencing warm weather with generally normal precipitation favoring an early start to corn planting. Generally, an early planting season leads to more acres being planted to corn, Brock says. He estimates that corn acreage at the end of June, however, will remain in the 88 million to 89 million acre range.

Rapid growth phase ending

The accompanying graph shows that the rapid growth phase of corn use for ethanol is coming to a close, Hurt says. This chart measures the corn use for ethanol as a percent of total U.S. corn consumption for the year.

Between 2005/06 (14.2 percent) and 2008/09 (30.5 percent), there was a huge expansion of corn use for ethanol, but that rate of increase really slows down for the 2010/11 crop. Hurt attributes this to the RFS requirements slowing down from an annual growth rate of 1.5 billion additional gallons per year to just 600 million gallons for the calendar years 2011 to 2015.

Moreover, the demand for corn from the domestic livestock market will likely remain flat as more dried distillers grains have replaced corn in animal rations. And, exports have been flat for the last eight years, Brock says.

While the rate of growth of demand for corn for ethanol will slow sharply, production potential is growing with higher yield potential each year and with higher acres available as land expires out of the Conservation Reserve Program (CRP). Last summer, 2.8 million CRP acres expired. This is being followed by 4.5 million, 4.4 million, 6.5 million and 3.3 million acres due to expire in September 2010, 2011, 2012 and 2013 respectively.

The vagaries of weather are always present in crop production and can dramatically change prices, but they might settle back into the $3.50 to $4.00 per bushel range for corn, Hurt says.

One also needs to consider outside markets. The value of crude oil could increase significantly (in fact, it was trading higher at $85/barrel in mid-April) which could help ethanol producers, Grabanski says. Other factors to consider include the value of the U.S. dollar, Dow Jones industrials, S&P 500, and precious metals. Exports are greatly influenced by value of the dollar.

China might decide to buy more food products in the world market and compete more heavily with ethanol for U.S. corn inventories, Hurt says. There also could be potential for another round of economic turmoil, maybe driven this time from those holding excess debt.

“Another important factor for the corn ethanol industry may surround the potential inability for cellulosic ethanol to develop into the magnitude outlined in the RFS,” Hurt says. “Corn farmers and the corn ethanol industry have met every gallon of the RFS mandate. The question remains whether they may argue for and receive some of the gallons of the cellulosic mandates that begin to expand exponentially after this year. Shifting some of the mandates from cellulosic to corn would increase demand rapidly once more and could contribute to corn prices being destabilized once again.”