Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
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Extension Communications |
11/4/03
FOR IMMEDIATE RELEASE
Contacts:
Robert Wisner, Ag Economics, (515) 294-6310, wisner@iastate.edu
Jean McGuire, Continuing Education and Communication Services, (515) 294-7033,
jmcguire@iastate.edu
Why the Jump in Late October Corn Prices?
Corn prices on nearby futures contracts rose about 28 cents per bushel between Oct. 22 and Oct. 29. The sharp increase was a surprise to many market observers, since U.S. farmers are harvesting a record corn crop. Robert Wisner, Iowa State University (ISU) Extension economist, says the price increase was primarily due to speculation about a possible change in Chinese policy toward corn exports.
Wisner added that a more cautious look at the Chinese situation and a private forecast showing a 200 million bushel increase from USDA's Oct. 12 corn crop estimate caused the market to give back over half of the increase by Nov. 4. If the private crop forecast materializes, the U.S. supplies could supply a 500 to 600 million bushel increase in exports from 2002-03 and leave carryover stocks about unchanged from Aug. 31, 2003.
While China has become a huge market for U.S. soybeans, it remains a major competitor in world corn markets. Wisner noted that in most of the last several years, China has been the third largest corn exporter in the world, after the U.S. and Argentina (excluding France, which ships most of its corn to other EU countries). He added that China has been a net corn exporter consistently since the early 1980s, except for two years in the mid-1990s when it temporarily became a net importer. In one of those years, 1995-96, corn prices reached new record highs of $5 per bushel. Simultaneous weather problems in the U.S. and China were important factors behind the high corn prices.
Speculation about a possible change in Chinese corn export policy was triggered when China announced in late October a $12 per metric ton ($0.30 per bushel) increase in the price of its corn for export. Many grain traders read the increase as a sign that China plans to become less aggressive in corn exports this winter. A few days later, there were rumors that China may completely halt corn export sales after the first of the year. "Unless confirmed, talk of a halt of Chinese corn exports should be categorized as a rumor," said Wisner.
He added that another possible reason for the increase in Chinese corn export prices might be to adjust for rising ocean freight rates. Freight rates from U.S. and South American ports to Asian markets rose sharply this summer and early fall, but only slightly affected costs of delivering Chinese corn to its export markets. With the delivered cost of competing corn rising, it would make good economic sense to the Chinese to raise the price of their corn. Most of China's corn exports go to nearby countries.
The economist noted that projecting China's corn exports is a very challenging exercise. A year ago, official USDA projected that China would export 374 million bushels of corn, an 11 percent increase from the previous year. Its actual exports reached a new record high of 571 million bushels, 71 percent higher than a year earlier. Two years ago in October, the USDA projected China to export 158 million bushels, a 45percent decrease from the previous year. Actual Chinese corn exports that year came out at 339 million bushels, an 18 percent increase.
Wisner added that three years ago in October, the USDA projected China's corn imports at 158 million bushels. Actual imports that year were 286 million bushels, an 82% increase from the earlier projections. Four years ago, Chinese corn exports finished the season 99 percent higher than the October projections. In 1996-97 and 1997-98, China's actual corn exports exceeded October projections by 678 percent and 147 percent respectively.
By this time in 2001, China had purchased 6.5 million bushels of U.S. corn in a move that was heralded as the beginning of continuous Chinese corn imports resulting from its entry into WTO. The purchases were later canceled and China actually increased rather than decreased its corn exports.
Summing up past history, Wisner said China's corn export potential for the year ahead is uncertain and will contribute to market volatility along with USDA's Nov. 12 crop forecast. The record of the last seven years indicates early projections of China's corn exports typically have been too low rather than too high, a pattern opposite from the one driving the late October corn price behavior.
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