The corn market needs to find an additional 12 million metric tons (mmt) (500 million bu.) of supply in the 2007-08 marketing year to fulfill demand expectations.
Global corn consumption in the '07-'08 period is expected to be up 10% to 750.8 mmt. Much of that additional demand will result from the U.S. government's long-range 2012 target of 7.5 billion gallons of ethanol production.
The supply issue is particularly relevant next year as the global corn market carries over its lowest inventories in recent record — less than 90 million tons. Even if each corn-growing country manages to repeat its best-ever supply performance in the coming year, overall output still falls well short of global requirements.
Since the U.S. is by far the world's leading corn supplier, the question that naturally arises is: Can U.S. farmers ramp up production beyond their previous record of nearly 300 mmt to meet the perceived shortfall of 12.3 mmt?
The current acreage estimate must also contend with an 11-year high in wheat prices, and a soybean price that has refused to give up any more ground to the price of corn.
As always, yields will play a major role in determining whether this can be achieved. Technology and innovation have ensured that trendline yields have risen steadily in recent decades, and will likely continue to climb in the years ahead. Even so, the record total yield achieved by U.S. producers is 160.4 bu./acre, posted in the 2004-05 crop year.
U.S. producers would need to harvest a record 76.63 million acres next year (based upon the 312.3 mmt required of U.S. producers to meet global demand). This is over 1.4 million acres above the previous harvested acres record of 75.2 million acres 1985-86 crop year, and would require a near-record 84.3 million planted acres in order to be attainable.
Compared with the< 78.6 million planted acres in 2006-07, is such a big jump achievable?
It all comes down to price. Corn prices have already risen significantly from a strong demand story, but I believe they haven't gained enough relative to wheat and soybeans to guarantee the increased acreage necessary.
Corn prices still have a ways to go to entice enough farmers to plant enough corn. Of course, there will be some rationing here and there among certain end users to ease some of the pressure. But the hefty appetite of ethanol producers will be a dominant feature of this market for the next several years that will more than compensate for any drop in feed demand.
The higher turn in corn prices is probably only the beginning of a longer-term structural shift in the corn market that will result in more acres and higher prices for some time. It's worth remembering that wheat prices during planting were at a record premium over corn, which ensured massive acreage allocations were given to wheat. As I write this, soybean prices are still holding at around twice corn values.
Justin Kelly is Director of Research and Marketing for E-Hedger, Chicago, IL. He is a third generation family farmer from central Illinois, has a B.S. in Agribusiness Management from Purdue University, and is a member of the Chicago Board of Trade (CBOT). He has experience as a CBOT corn broker and research member of the Iowa Grain Co. Research Department.