Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
11/20/02
Contacts:
Robert Wisner, Economics, (515) 294-6310, rwwisner@iastate.edu
Jean McGuire, Continuing Education and Communication Services, (515) 294-7033,
jmcguire@iastate.edu
Corn Market Prospects: Is this Another 1995-96?
By Robert Wisner
Extension economist
Iowa State University
An extremely strong basis for corn and soybeans during the harvest season hints that many grain producers have been quite optimistic about price prospects into spring and are reluctant sellers. From a supply perspective, there are some similarities between this year and 1995-96, when corn and wheat prices set all-time record highs. In the spring of 1996, corn prices exceeded $5 per bushel on the futures market and wheat exceeded $7. Is the demand situation for U.S. grain strong enough to support similar prices in 2003? The answer to that question is very important to grain and livestock producers, lenders and other agribusinesses. To provide a perspective on the question, here are some differences and similarities on both the supply and demand sides of the picture.
Supply differences
On the supply side, both 1995 and 2002 were years of good corn yields in parts of the upper Midwest, but with low yields elsewhere. This year, however, the word "good" has to be replaced with "phenomenal" when describing Iowa and Minnesota corn yields. Also, projected world reserve feed grain stocks for the end of this marketing year are below current USDA estimates for 1995-96. Projected world wheat stocks were below current estimates of 1995-96 ending wheat stocks--until major upward revisions in Chinese wheat stocks were made on Nov. 12, 2002.
For further analysis, consider the production-use gap that had to be filled in 1995-96. The 1995 U.S. corn crop, at 7.37 billion bushels was 2.03 billion bushels below the previous year's use. Corn carryover stocks going into 1995-96 were 1.56 billion bushels, only marginally below this fall's level. That supply situation dictated that even if carryover stocks had dropped to zero, corn use in 1995-96 would have to be reduced by nearly half a billion bushels or 5 percent. The market's way of discouraging use and rationing short supplies is through higher prices.
For the current marketing year, the national corn crop is estimated at 9.0 billion bushels, 0.81 billion bushels below last season's use. The September 1, 2002 corn carryover stocks totaled 1.6 billion bushels. This year, to reduce stocks to zero, total use would need to be increased by 0.8 billion bushels or 8 percent. Current conditions indicate little or no rationing of corn demand will be needed this marketing year, beyond what is already occurring in livestock feeding.
In the world picture, the recent sharp upward revision of estimated Chinese wheat stocks is the second such revision since early 2001. USDA projections of world feed grain stocks as a percent of use are modestly below the latest figures for 1995-96. However, it should be noted that world feed grain stocks also were revised sharply upward last year because of a large upward revision in estimated Chinese feed grain stocks. This year's projected world feed grain stocks as a percent of use are modestly above the pre-revision 1995-96 levels (levels anticipated as the 1995-96 marketing year unfolded), and have been rising in the last two months. World wheat stocks projections are moderately higher than were anticipated in 1995-96. Also, the U.S. hard red winter wheat crop is in much better condition this fall than in the fall of 1995. Wheat market conditions indirectly affect corn prices.
Differences on the demand side
In general, the U.S. and world demand for feed grain is considerably weaker than in 1995-96. That year, U.S. hog production was unusually profitable because of high prices and expanding world demand. This year, farrowings and farrowing intentions indicate hog numbers will decline slightly. Hog prices in the spring of 1996 were in the $50 to $60 per hundredweight range, much higher than this year. Hogs are a major source of demand for corn. Recent numbers of cattle on feed in major states were 9 percent below a year earlier, also pointing to reduced domestic feed use this season.
Domestic processing demand is in an accelerated expansion phase, with a modestly stronger expansion rate than going into 1995-96. However, the rate of expansion appears to be slowing from earlier indications, with construction of three plants in Iowa being delayed.
In the export picture, U.S. corn export inspections from September 1 through November 14, 2002 were 25 percent below a year earlier. Exports and outstanding unshipped corn export sales through November 7 were the lowest in a number of years and were 17 percent below the five-year average. Export commitments, at 9 percent below a year ago, also are lagging well behind the rate needed to meet USDA projections for a 6 percent increase for the marketing year.
One other major change in the world picture is that China is very aggressively exporting corn. It has taken over most of the South Korean corn market and has made significant inroads into U.S. corn exports in other Asian markets. In 1994-95 and 1995-96, China deviated from its normal export position and had net corn imports of about 50 million bushels. This year, it is expected to be a net exporter of nearly 400 million bushels of corn. Also, the former Soviet republics and Eastern Europe together are estimated to have about 1.3 billion bushels of grain available to export this season. Much of it is lower quality wheat and barley, both of which can substitute for corn. It is being sold at very competitive prices.
To summarize, at this point in the 1995-96 marketing year, supply-demand comparisons indicated substantial rationing of demand was necessary to keep from running out of corn by late summer. This year, to put the supply-demand balance in the same position as in 1995, an increase in total corn use would be needed.
What to watch
Key indicators to watch for signs of a tightening in the corn supply-demand balance include:
* Weekly export inspections and sales reports, which USDA issues on Mondays and Thursdays, respectively
* Competition from foreign feed wheat
* USDA's Jan. 10 final crop report and first grain stocks report for this season
* 2003 corn planted acreage prospects
* Spring and summer weather prospects for the Corn Belt
To bring a significant rally in corn prices this winter, weekly export shipments and net sales need to move consistently into the 43 to 50 million-bushel per week range from mid-November through early January. One development that could convert this season into a 1995-96-type marketing year would be major crop problems again in a large part of the Midwest next year. History and indications from climatologists both indicate the probability of that occurring is low, in part because of an anticipated El Nino weather phenomenon.
Basis behavior
State crop estimates show a very large decline in corn production from last year in the states to the west, south and east of Iowa. Production was sharply above last year in Iowa, and also in the states from North Dakota to Michigan. These regional patterns indicate cattle feeding areas of the Great Plains, and some livestock and poultry feeding areas to the south and east likely will need to come to Iowa for part of their supplies. It is even possible that some eastern Corn Belt processors may need to draw corn from Iowa next summer. The result is likely to be a stronger basis for corn than normal for most of this marketing year. The basis is the relationship between local grain prices and the futures market. Exact strength in basis will vary with location. The basis at processing plants, and at large livestock and poultry feeding operations at times, may be exceptionally strong as these businesses attempt to secure adequate supplies to prevent shut-downs or disruptions in feeding operations.
Price/carryover stocks relationship
In the last few years, farmers and grain analysts have both observed that much smaller carryover stocks are needed to depress grain prices than in the past. This is partly due to freedom-to-farm policies that have eliminated government storage programs. In the past, specific minimum sales or release prices had to be reached before old-crop grain could be sold into the market. Farmers and elevators were paid to keep supplies in reserve for several years. Under current policies, farmers and the grain industry do not have such assistance in storing grain. As a result, grain prices have tended to be depressed if stocks move modestly above "pipeline" levels.
Pipeline stocks are inventories needed at the end of the marketing year (Aug. 31) to maintain normal processing, feeding, exporting and merchandising operations until the new crop is available. The USDA's revised ending corn stocks projections for this marketing year are now placed at 848 million bushels, about 30 percent above minimum pipeline needs. With lagging exports and one more crop estimate due out on January 10, some in the trade anticipate this number may be modestly higher in a few months. That would be an adequate level of stocks for the industry, if the 2003 U.S. corn crop prospects are good.
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