Never in history have planted acreage and yield been so important to price as now. Acreage plus yield is going to be everything in the corn market this year. Corn use for ethanol is likely to surpass exports last year, and demand continues to catapult to new highs this year. Between now and the March Planting Intention Report everyone will be “estimating” how many corn acres U.S. producers will plant.
Last year producers planted 78.6 million acres. It's a well known fact that planted acreage will be sharply higher than last year, but the question is by how much. We believe the market is trading an estimated 85 million acres (as of mid-December). There are some indicators that the planted acreage may be even higher.
What are the key indicators? To begin with, anhydrous ammonia sales and application last fall in many areas of northern Iowa was more than double a year ago, according to some of our contacts. Almost every seed corn company has been reporting sharp increases in sales of anywhere from 10% to 20%. If you want a grain bin constructed in the next year, get on a waiting list.
There are some who believe that in order to plant more than 85 million acres, cash corn prices in the central Corn Belt need to rally above the $4 mark. I doubt that's necessary. The reason: Most producers already expect $4 corn, and perception and expectations are often more important than reality. Whether it happens, many people in the coffee shop already are assuming that corn has to go to $4. But does it?
With all of these assumptions still in the air, it's not difficult tosee why wild price movements are almost guaranteed until this year's corn crop is not only planted but also in the bin.
Regardless of the planted acreage, a national average of 150 bu. or less yield and this market is very under priced. Push the national average yield to 160 bu. (it was 160.4 bu. in 2004-05) and corn prices this summer will experience one of the biggest bear markets in history.
That may sound impossible to all the corn bulls, but even with surging ethanol capacity, one solid year of yields and carryover supplies will actually go up.
For those who believe that corn prices can only go up, keep in mind that the dollar per bushel move to the upside this fall has already discounted a lot of bullish news. Markets need a continuous flow of bullish news in order to keep going higher — bear markets need no news at all.
Big acreage combined with big yield will equal a big bear market. Any acreage with a small yield — hang on to your hat.
Hold Onto Your Hat
This graph is very revealing on just how wild prices could be over the next several months. Here's how you use it.
Pick the expected planted acreage line that you think will be most likely. For example, let's use 85 million acres. Then look at the horizontal line to estimate the national average yield, draw a line up to the 85 million-acre line and then a horizontal line over to the national average price and you can estimate fairly closely what cash corn prices will average (this would be a Central Illinois price).
In this example, at 85 million planted acres and a national average yield of 154 bu., the expected average price would be approximately $3.55.
Drop the yield to 148 bu. and with 85 million acres planted, the national average price would be $4.15. Push the yield to 160 bu./acre and the expected average price would be about $3.20.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.