Analyzing the Complex 2008 Corn Crop

By Elaine Kub | September 08, 2008
Coming off of the largest corn crop in United States history in 2007 and facing favorable corn prices, 2008 promised to provide another bin-bursting crop. Like 2007, the demand for corn would be equally as large. Unfortunately, Mother Nature had other plans and caused notable concern for many corn growers and ethanol producers.

Some worry the supply generated from the 2008 corn crop will not be able to support the still-growing demand, while others believe supply will not be an issue and that corn prices could drop to the $5 range for the remainder of 2008 and into 2009. With harvest season well underway, many scenarios exist for what the 2008 corn crop might hold and its long-term implications for both corn growers and ethanol producers.

Early Supply and Demand Projections
In the past few years, the large gains in the corn market have been spurred by increased demand. However, as new crop speculation carried corn prices above $6 per bushel, the market fundamentals shifted as traders began reacting to worries over supplynot demand.

The first indication that supply might be an issue came in May, when the USDA projected the United States would use 12.76 billion bushels of corn, 3.95 billion bushels of which would go toward ethanol production. This left an estimated 763 million bushels in ending stocks, which are bushels not in use from immediate demand. The ending stocks are essentially what the United States will have in reserve or inventory. This number, in percentages, is also referred to as the stocks-to-use ratio.

Over the past 20 years, the United States has on average kept 15.9 percent of its yearly corn crop in reserve. According to the USDA's May projections, the increased demand for corn will leave the United States with only 5.9 percent in reserve. This by most accounts would be considered extremely low.

These lower stocks-to-use ratios helped fuel speculation of a supply-driven corn market and pushed market prices higher during the early summer months. As summer progressed, traders proved to be sensitive to conditions that might affect the corn crop's yields, further hampering the overall supply. As a result, market prices were increasingly volatile,
moving as much as 15 cents each day for days on end.

Much of the movement seen in the market was based on new crop speculation. The same concerns over yields will determine how the corn market reacts after harvest.
Yield projections have varied through the summer. In late July, Agriculture Secretary Ed Schafer said the USDA projections indicate that, despite crop problems in parts of the country including flooding in Iowa, U.S. corn farmers are still expected to raise the second-largest crop in history.

Schafer's comments helped reassure the market that production would not be an issue. However, taking into account this year's much lower-than-average stocks-to-use ratio, corn and ethanol producers should keep a watchful eye on factors influencing the crop's yields.

A shift in yields, even as small as five to 10 bushels per acre, can have a significant impact on the stocks-to-use ratio. When examining the potential yields for this year's corn crop, it is important to look at what factors might have already had an effect.

Effects on Yields
One of the biggest struggles corn growers faced in 2008 was a late start to planting. A late planting season alters the time during summer when the stalks begin to tassel and silk and kernels are pollinated. If this stage occurs during the hotter parts of summer, pollination will struggle and negatively affect yields.

Wet and cooler-than-average conditions kept most Corn Belt farmers out of the fields until late May. Although farmers were able to catch up and put crops in the ground before June, most lagged about one week behind schedule. At press time, it was difficult to determine how many acres have been affected by insufficient pollination and what, if any, effect it will have on the overall yields.

The widespread flooding across Iowa and along the Mississippi River created a surge in corn prices. Prices soared from $5 to nearly $8 per bushel with the prospect of losing millions of valuable corn acres. After the initial reaction subsided, prices began to level out to a more neutral area between $5 and $6.

It is possible, however, that some reverberation from the June flooding may be seen. Although it was estimated that the damage was not as significant as first believed, poor field drainage and waterlogged crops could affect yields. The effect will be best measured once the corn is completely harvested. With millions of acres in question, the markets will have a more fundamental reaction once the final numbers are tallied.


SOURCE: DTN

Late-season weather is always a concern for corn growers, particularly when impacted by a late planting season. A late start causes corn to have shallow roots and not be as resistant to strong winds that accompany severe weather. Hail is another summer weather hazard. As the temperatures begin to shift in the fall, hail becomes a decreasing threat for corn growers. When corn stalks become uprooted by strong winds or battered by large hail, these are considered to be unrecoverable losses.

Frost is another weather condition that might worry some farmers this year. In most years, freezing temperatures are looked at favorably in corn country during the late harvest season because the cold weather can help speed up the drying process. As a result producers do not need to spend as much money to artificially dry the grain for storage.

Due to the late planting and slower-than-average crop development, an early frost will not be looked at as favorably. DTN agricultural meteorologist Bryce Anderson forecasted a 20 percent to 25 percent chance for early frost for much of the northern Corn Belt including the northern 40 percent of Iowa, northeast Nebraska, far northern Illinois, and all of Minnesota, the Dakotas, Wisconsin and Michigan.

Of this area, the biggest threat is in the Dakotas, western and southwestern Minnesota, and northwest Iowa, according to Anderson. The average first frost date is mid-to-late September in North Dakota, late September in South Dakota, and approximately Oct. 1 in southwest Minnesota and northwest Iowa.

Looking Ahead
The 2008 corn crop essentially holds two likely scenarios. First, despite the adversity, the corn crop produces average or above-average yields. Second, the crops faced too many irrecoverable yield losses, further tightening the U.S. corn inventories.

In the first scenario, the national trend-lines traditionally show better yields each year as a result of better genetics and planting technology. If this is the case and we have larger ending stocks than currently projected, and assuming demand remains stable, prices will stabilize and could possibly remain in the $5 range. At this price point, farmers will remain comfortably profitable, but with rising seed and fertilizer costs corn producers might need added price incentives to replant corn instead of other profitable crops in 2009.

In the second scenario, depending on how tight the inventory supply becomes due to a loss in yield per acre, corn prices could rise significantly. Since supply is elastic but the demand is currently less so, prices could easily reach new all-time highs. If this is the case, ethanol producers could see a difficult 2009 but expect relief as the fundamentals of supply and demand correct themselves in a 12- to 13-month cycle.

Generally speaking, with a supply-based spike in prices, farmers would most likely enter 2009 ready to plant as much corn as possible to capitalize on the higher prices, which will bring prices back down to more relatively reasonable prices. At the same time a supply-driven price spike might help to slightly curb the growing demand.

Corn producers have their "customers" in mind this and every year. Although they would have preferred to provide as much profitably produced crop as possible at prices that would keep their ethanol- and livestock-producing customers successful, circumstances beyond their control may have challenged their 2008 product to such a degree that not everyone's needs will be met.

Elaine Kub is a grains analyst at DTN. For more information, visit www.dtnprogressivefarmer.com.