USDA's record crop forecast may dampen corn outlook

It's been said that the cure for low prices is, well, low prices. Corn producers who haven't priced their 2004 crop are finding that the converse of that statement is equally true.

With USDA forecasting record corn production of 11.6 billion bushels in 2004, December corn futures may take another plunge, dropping even further from last April's high of $3.42 per bushel in Chicago.

For now, however, Chicago corn futures seem to be holding around $2 per bushel, or slightly below the level where they were when USDA released its Oct. 12 crop production report forecast, notes Kurt M. Guidry, associate professor in the Department of Agricultural Economics and Agribusiness with the LSU AgCenter.

“I would say that it is going to be difficult for this market to make any substantial move higher until we likely see the traditional seasonal strengthening in March and April,” he said. “The one positive we have seen is that December 2004 prices have been able to close above $2 this week despite the very bearish report.”

Speaking at the Southern Region Agricultural Outlook Conference in Atlanta, Guidry said the seeds of this bear market were sown when farmers began making final planting decisions last spring.

“Prices for new crop corn were well above $3 heading into the planting season,” said Guidry. “Those prices helped attract additional acreage into corn in 2004. Corn acreage increased by 2.3 million to 81 million acres, the highest level since the 1985-86 marketing year.”

The planted acreage could have been even higher if November soybean futures hadn't been approaching $8 per bushel, likely drawing acres from corn into soybean production, he said.

On top of the increased acres, farmers have enjoyed nearly ideal growing conditions. When Guidry spoke in late September, USDA was rating 70 percent of the U.S. corn crop from good to excellent and forecasting an average national yield of 149.4 bushels per acre.

In its Oct. 12 crop production report, USDA's National Agricultural Statistics Service increased its yield forecast to 158.4 bushels, up 9 bushels from September and 16 bushels from the October 2003 forecast.

“With the large production numbers faced by the market, the positive tone of the market at the beginning of the 2004 calendar year slowly started to erode,” says Guidry. “Since setting a high of $3.42 in the December corn futures contract in April, the contract has slowly fallen by nearly $1.40 per bushel.”

December corn closed at $2.02 per bushel on Oct. 12.

While the market was looking for a large crop in the Oct. 12 report, USDA's forecast was much higher than the average of most trade guesses, says Guidry.

“While it is true that the large increase in the U.S. crop is definitely a negative in the market, to me, the bigger negative is what was done to world production and stocks. The market knew the United States would be large, but most analysts felt world stocks were still relatively tight.

“In this latest release, world stocks were not only increased, but the numbers will break the four- to five-year trend of year-to-year decreases in stocks. This should bring into question the United States' ability to export corn, and USDA did reduce its export expectations slightly.”

Prior to Oct. 12, some analysts thought some positives remained in the market outlook.

“First, strength in domestic and export demand during the 2003-04 marketing year had resulted in a reasonably tight stock situation entering the 2004-05 production year,” Guidry said. “Lower stocks have somewhat softened the blow of this record crop.

“Second, domestic demand for the 2003-04 marketing year was expected to increase by 245 million bushels to 8.62 billion bushels. The increase in demand is being led by continued growth in ethanol production, which is expected to increase by 170 million bushels and will account for nearly 10 percent of total corn use.”

Analysts also expect feed demand to remain strong with increased dairy cow numbers and larger cattle-on-feed numbers along with increased grain use per grain consuming animal unit.

Chinese demand is also expected to help boost U.S. exports by 215 million bushels to 2.1 billion bushels this marketing year. “Production difficulties, increased demand and a change in government policy have depleted China's stocks of corn,” says Guidry. “Since the 1999-2000 marketing year, corn stocks in China have fallen from 123 million to 28 million metric tons, a decrease of 77 percent.”

The drastic decline should limit China's ability to export corn. And aggressive early sales in the first two quarters (May-July, August-October) by Argentina and Brazil could hamper those countries' ability to export corn later this fall.

But the larger crop appears to have changed some of those positives. Finding a place for that corn and the aggressive exporting by Argentina and Brazil in the first half of 2004 and resulting slowdown in demand for U.S. corn could keep prices at $2 or lower for some time.

So farmers could be faced with a difficult decision on whether to sell their corn or put it in the bin and hope the prospects for increased demand will materialize.

“Currently, low corn prices have resulted in a 31-cent-per-bushel loan deficiency payment,” says Guidry. “Producers who did not take advantage of the preplant price strength may consider taking LDP payments and developing a post-harvest marketing strategy to capture any price appreciation.”

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