By Michael Swanson Ph.D., Chief Agricultural Economist
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Corn and feed supply will finally catch up to demand with the 2013 crop year. The USDA projects a 17% stocks-to-usage ratio, the highest since the 2005/2006 crop year. The U.S. agricultural system managed to accomplish this rebalancing through the normal supply and demand tug of war. 2012 saw U.S. national cash corn prices average an all-time record of $6.67 per bushel, and the first six months of 2013 have already exceeded that record at $7.01 per bushel. Not surprisingly, U.S. exports are at record lows for the modern era, and feed and ethanol demand have been curtailed. Even with the excessive spring moisture, U.S. farmers planted 97.4 million acres. With more or less normal weather, crop conditions have improved since that point, and in week 28 crop conditions currently remain above the 30-year average. Taken as a whole, the futures markets have started to discount the majority of the production risk going forward, and prices of December 2013 corn futures have been trying to break below $5 per bushel, which is a major psychological barrier.
The U.S. corn and feed market is just starting the discovery phase for the bottom of the market in the new era. The 2012 drought was a once-in-30-years event which pushed the corn market to discover the new price rationing point of approximately $7+ per bushel. Farmers and grain buyers can be fairly confident that $7+ corn will be the new high price. Future supply disruption events will be measured against the demand reduction that occurred when corn was above $7 per bushel. Until further evidence emerges, this will represent the high range of the new era. Additionally, the market will remember that demand rationing occurred when the global economy was on a modest growth path with $90 or higher per barrel of oil. This is a very different environment than the global recession of 2009, when demand rationing pushed prices to the mid $3 per bushel range.
The next phase of the "new era" involves finding the bottom of the price range. Looking back to the last change in pricing ranges, it took almost 15 years to truly discover the bottom range of corn. Corn prices jumped from about $1 per bushel to $3.50 per bushel following the "oil shock" of 1973. Using an eight-quarter moving average, U.S. corn prices remained between $2 and $3 per bushel from 1974 to 1985. The market tends to project that corn prices from the last couple years will be the average price "going forward." During this 11-year period, the two-year average fluctuated with crop conditions and other demand drivers, but it essentially remained price-bound. Farmers were bidding up land rents and prices, and energy costs remained elevated. Additionally, recessions had no clear impact on crop prices. In fact, a couple of the strongest price periods occurred during the recessions.
In 1986, corn prices broke decisively downward, staying close to $1.50 per bushel. That price was still well above the previous era's average price of $1 a bushel, but it was low enough that the new price for land and overhead could not be cash flowed at a profit. The two year dip in prices was enough to push many farmers out of the business, and they were unable to benefit from the recovery to $2.50 per bushel corn in 1988. Cost of production data was not nearly as detailed back in the 1970s and 1980s. All estimates of cost structure would be speculative, but it is likely that input prices were reduced due to the low prices of 1986-1987. The overall lack of profitability led to a substantial reduction in corn acres planted. Corn acres planted did not recover to boom-year levels until 2007, a 22-year pause.
Looking forward, a 14-billion bushel crop in 2013/2014 will definitely change the market's perception of what it needs to pay for corn. It should also mark the start of the market's discovery phase for what constitutes lower prices. There will be conflicting signals that keep the market highly volatile. Between new foreign supply competition and global demand growth, the race will be to find out which has the strongest legs. If the earlier era of higher prices (1970s and 1980s) serves as reference, it will be a long and drawn out process to establish the bottom end of the range.
Wells Fargo Agricultural Industries presents this analysis as a complimentary service to its employees and customers. It cannot guarantee the accuracy of all the sources of data. And, commodity prices are extremely volatile based on unforeseeable changes. These estimates will change with all new market changes.