Domestic and global buyers are expected to consume more than 13 billion bushels of U.S. corn from the crop soon to be planted. While there is a nearly 1.8-billion-bushel carryover that can be used as a cushion, against any shortfall, what would happen if the 2010 corn crop did not reach yield expectations? Such a market moving development might also be felt in decisions that will impact ethanol and export policies and also impact the livestock industry. Oh, the questions that need to be answered!
When commodity prices rose three years ago along with the price of oil, agriculture and ethanol received a black eye from consumers and the food industry. While the rise in food prices was shown to be energy related, and not an issue of insufficient food production, the problem will need to be addressed should there be continued challenges. That is what University of Illinois Economists Darrel Good and Scott Irwin have attempted to do as they look at potential yield scenarios in a new research report.
While corn yields are increasing with the help of production practices and better genetics, some believe the rate of increase will continue to accelerate. This has lead to the industry confidence that yield shortfalls are a distant memory. The economists say, “The general lack of concern about a weather-induced shortfall in U.S. corn production suggests that market participants and policymakers may be ill-prepared to cope with such a shortfall should it occur,” and they add, “A shortfall in production any time soon would likely result in the need for a cut in consumption and sustained high prices.”
What is the explanation for the yield trend? Is it attributable to genetic seed technology instead of weather? Or is it that corn yields are less sensitive to hot and dry weather conditions than in the past, but keep in mind we have not had a severe drought for many years. There is also the thought that poor weather may have a larger negative impact on yields because higher plant populations demand more soil moisture. With such possibilities, the Illinois economists attempt to evaluate the yields in Illinois, Iowa and Indiana based on the five poorest growing seasons in the past 50 years, as well as the potential state yields based on an average of the highest yields. They determine a composite yield of 156.7 bu. for a trend yield, a poor-weather yield of 134.5 bu. and a good-weather yield of 172.5 bu., with the top and bottom only found in one out of 10 years.
The economists say the trend and good-weather scenarios would result in ample supplies of corn with consumption expansion and adequate carryout. The good-weather scenario would result in an average farm price below recent averages. The poor-weather scenario would require substantial reduction in consumption and average farm prices would likely be very high compared to recent averages.
The poor yield would produce a national crop of less than 11 billion bushels, and consumption would be limited to the point of curtailing some feed use, but that amount would be determined by how much DDGS is available from ethanol production. With the federal mandates for biofuels production, at least 4.4 billion bushels of corn would be required. Corn used for other products, such as HFCS and starches would be pared back. However, exports would remain about the same because of global need. Under the poor-weather scenario, the corn price would be influenced by a 16.7% cut in livestock feeding and an ethanol price that would allow refiners to buy corn and still make a profit. They believe that livestock numbers would drop without the forced liquidation as seen in the past.
With poor weather and a low-yielding crop, USDA will impose certain policies such as allowing CRP to be grazed and baled, restrictions on exports and limitations of corn going to ethanol refineries instead of livestock operations. But should other policies be changed, such as the biofuels mandate, the tax credits for blenders or the import tariff? Such a financial burden would fall on the ethanol producers and precedent-setting compensation could be considered. The researchers urge policymakers to establish a set of responses before they would be forced to do so. And they conclude, “History suggests it is not a question of whether or not a shortfall in corn production will occur, but instead the questions are: When? And how severe?”
Although corn genetic technology is advancing, and severe weather problems have not impacted crop production for many years, there is always a chance that the U.S. corn crop could be reduced by adverse yields and that will affect many users. Exports will continue to buy if allowed, livestock producers will have to buy regardless of price, and the ethanol market will buy high priced corn as long as a profit can be shown. However, if corn yields drop to the point that policy decisions will have to be made on adjusting the biofuels mandate, policy makers should anticipate such problems and come to agreement before being forced to do so.