Anything can happen when it comes to the markets and, although I lean toward the bearish side and look for lower prices in the long term, it's important to take a look at the corn market from the viewpoint of the bulls and then consider the possibilities of both scenarios.
The table below shows the extreme range in carryover supplies for next year depending upon what assumptions you make.
Let's first take a look at the average estimates for corn in the center column. Beginning carryover supplies (this year's carryover) will likely not change significantly from 2.36 billion bushels. The key variables in corn this coming year are:
Of those four, the most important factor will be yield. First let's look at planted acreage. Many are assuming that planted acreage is going to drop significantly this year due to the cost of production of corn. U.S. farmers planted 81.8 million acres of corn this past year. Some estimates for this year are as low as 79.4. I'm going to stick with 80 million acres.
Assumptions that corn acres would be lost in the west and southwest due to high irrigation prices have now been subdued with the recent collapse in natural gas and diesel fuel prices. Acres that many assumed would go into milo will instead go into corn.
Trend line yield this year would be 150 bu./acre. This past year corn yields averaged 147.9 bu./acre with the worst drought in the northern one-third of Illinois in more than 30 years. Even though some climatologists are predicting a high probability of a drought this coming year (someone is always predicting a drought) the real question is what if we don't have a drought? How much more severe could a drought be than the one just experienced? If the drought occurs in less productive areas than northern Illinois, will it really impact national yields?
With the tremendous improvements in corn genetics, our bias is that 150 bu./acre for this coming year is a conservative estimate. Given normal weather, to have a national average yield of 160.4 bu./acre (the 2004-05 yield), would be very obtainable. Good weather would produce a national average yield well above that number.
While I hesitate to give such a wide range, carryover in corn next year could range anywhere from 1.5 billion to nearly 2.8 billion bushels. Our bias is definitely toward the higher end of that range. We remain confident that U.S. farmers will be able to pump out some big yields with the new genetics available, and lack of rainfall, if it occurs, will only have a limited impact.
Price swings to the upside through spring are selling opportunities. Basis levels should be wide again this fall. Forward contracting fall delivery grain will likely be advantageous.
No question about it, the domestic demand for corn for ethanol is enormous. I added 375 million bushels to this coming year's crush for ethanol. That's as fast as anyone can build plants. For the bullish estimate, however, I jumped the corn for ethanol crush to 2 billion bushels.
Also on the bullish side, let's assume that China becomes either a buyer of corn or, just due to lack of Chinese exports, the U.S. is able to pick up exports to Korea and other Asian countries. We doubt that China itself will become a buyer but just by having a lack of exports out of that country, the U.S. will benefit.
On the bearish side, just push the yield to 160 bu., which occurred two years ago, and the mounds of corn throughout the Corn Belt will be beyond what any ethanol plants can crush or ocean-going vessels can ship to Asia.
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.