One universal truth is that better decisions are made more frequently during bad economic times and poor profits than during good economic times and great profits. When profits aren’t great, people buckle down and analyze all expenses and all risk. When profits are big and business owners are flush with cash, this often leads to reckless decision-making because the decision maker feels “bulletproof.”

And so it is in today’s environment. Back in the 1980s, an old rule of thumb was that cash rents for good corn land should run about a $1/bu. In other words if you’re average yield was 150 bu./acre, the benchmark would be a cash rent level of $150/acre. Cash rents now run from a low of $2.50/bu. to over $5/bu. At the higher end, the risks are enormous if a person is only locking in the input prices and not locking in their selling prices.

 

Historical perspective

For those who’re convinced that corn prices can’t go down, look carefully at the chart. Following the 1996 peak in corn prices, the market dropped by 68% in value before hitting a low of $1.74. In 2008 after peaking at $7.65 in nearby futures, six months later the market was at $2.90, a 62% decline.

This August nearby futures peaked at $8.44. A 62% decline would take the market to $3.21 and a 68% decline to $2.70. This is not a prediction – just an observation. The observation being clear: There is an enormous amount of risk with corn prices over $7.

Could $3 corn actually happen? Frankly we’re not making that a forecast, but consider the following:

  1. Our current estimate of planted corn acres this coming spring in the U.S. is 98 million acres compared to last year at 96.9 million. Almost every analyst in the country is somewhere between 97.5 and 99 million acres.
  2. Planted corn acres are increasing worldwide.
  3. A normal trend line yield this coming year would be 160 bu./acre. That would take carryover from this year’s estimate of about 700 million bushels to 2.77 billion bushels. That alone would take corn prices in the low $4 range.
  4. Corn exports are currently running at the lowest level in years.
  5. In 2011 the U.S. farmer shared corn exports worldwide was 38.9%. A year ago it was 52%. The FSU (Former Soviet Union) has gone from 5.8% of the world’s corn exports that year to a startling 16.8% this year. The export market has been and is being taken away from the U.S. farmer. It will be difficult to get back.
  6. Feed usage for livestock has been cut dramatically. Even China is substituting wheat for corn.
  7. The cutback in ethanol production is well publicized. It will come back—but will take time.

 

The other side

Many of you are already making the statement that this could only happen if we produce a big crop. I agree. One can argue weather problems, planting delays and who knows what else. All are valid arguments. But the other valid argument is the longer corn prices stay at $7 or higher, the more demand is going to be hurt and the more acres that will get planted. No matter how you slice it, from $7 corn, 95% of the arguments argue for much lower prices. This is a seller’s market.