Is Corn Headed for Zero?

Corn fell below $3 on Friday, closing at $2.935, the lowest price in two years. That's a slide of 61% since hitting this year's high of $7.625 this summer.

Corn

Unsurprisingly, weak demand is the primary reason cited for the decline in corn prices, and analysts aren't optimistic that demand is going to turn around any time soon. Joel Karlin, an analyst with Western Milling, said the following on the Cattle Network:

"Demand is weak on all fronts. Export sales are about half what they were last year, feed demand is weak due to problems for livestock and dairy producers, and ethanol is suffering as prices are at a 50-cent premium to gasoline."

Additionally, the rising dollar isn't helping things much, making dollar-priced commodities more expensive to our friends across the ocean. The irony, of course, is that the rest of the country is probably looking at the decline in commodities prices and the strength of the dollar as "good things." I know I'm happier paying $2 at the pump. But it makes for terrible times for corn farmers, especially those who are standing out in cold, barren fields, trying to figure out what they're going to plant next year.

What happens if corn prices continue to fall? Do farmers plant corn next year? At some point, the cost of seed, fertilizer, labor and fuel may well push right up against what farmers can expect to sell the crop for. At what price do farmers throw in the towel and decide to plant something else - anything else - or nothing at all?

(The alternatives aren't that great. Soybeans, the most commonly rotated crop with corn, closed at $7.83 on Friday, a far cry from its own high of $16.65 this summer.)

Soybeans

We've written about how falling demand has affected the mining industry, where the price of various metals and products has gotten so low that companies are slowing production or shutting some mines temporarily, setting the scene for an eventual comeback. Can and will farmers do the same thing?

Most likely not. Federal farm subsidies will serve to keep most farmers in the black enough to keep planting, but it's an interesting intellectual question: What happens when fields truly go fallow? Mines can start back up (theoretically) at any time. Farmers, on the other hand, still have to contend with weather. If they miss a planting date, it's a long wait until they can get back into business.

The government has a price support program for agricultural commodities precisely for situations like this. Charlie Sernatinger, an analyst with Fortis Clearing Americas, was quoted by Reuters this week: "The loan rate for corn next year is $2.04, so that could be the bottom for the cash market." The $2.04 price is the price at which our government allows farmers to store the corn they have grown in silos and take out low-interest loans instead of selling the corn. If the price is above $2.04, the farmers have to sell the corn.

That's assuming they've grown it.

One of the many chicken entrails investors can look at in gauging sentiment is the supply side - as in, who's supplying the farmers. According to Monsanto, it looks like farmers are still planning on planting, at least something. Monsanto [MON] is the big dog in the genetically modified seed business - holding 95% of a rapidly expanding market. They recently received good news from the EU, in that it's now OK for Monsanto GMO Soybeans to come into EU countries. This rounds out the broad approvals already in place for EU countries to import GMO corn.

CBOT's Commodity News For Tomorrow (12/4/08) did an interview with Brett Begemann, Monsanto's executive VP of global communications, about how the seed market looks for 2009. According to Begemann, things are looking pretty good.

"Monsanto Co. is expecting strong sales of its biotech seeds in 2009 despite the fact that they are more expensive than non-biotech seeds and famers will be looking for ways to cut expenses."

The one thing he did note is that seed sales have been delayed a bit due to delayed planting and harvesting this year. But the party line is that everything is fine. The article goes on to say, "Farmers may cut back on fertilizer usage in 2009 to save money, but not in the quantity or quality of seeds, Begemann said. Farmers just don't cheat on the seed. They're going to buy the best seed for their farm."

Normally I'd be skeptical and say "Well, what else is a Monsanto rep going to say?" But this has been a season of layoffs, dismal news and above all else, expectations management: I'm inclined to believe Monsanto on this one.

If they're right, life could very interesting for companies like Potash Corporation [POT] and Mosaic [MOS], companies that have seen their stock prices fall more than the S&P 500. (Potash Corp has lost 62% since the beginning of the year, and Mosaic has lost 70% - the S&P 500 has lost a comparatively conservative 40%.) There are dueling forces at work here: If farmers just plant fewer acres, they may be inclined to fertilize them heavily to get the maximum yield from fewer acres. On the other hand, they might just cut back on input costs but keep plants in the ground. One way, Monsanto comes out on top; the other, the fertilizer companies.

Pundits are on both sides of the issue: Forbes', Potash Says Everything's Coming Up Roses, paints a rosy picture, while the WSJ's Fertilizer Stocks Having Trouble With Growth offers a more pessimistic view.

The Ethanol Question

You'd think that low corn prices would be good news for ethanol producers; after all, a U.S.-based ethanol producer buys a lot of corn. But many ethanol producers have locked in corn at much higher prices, and the ethanol market is in a world of hurt right now.

Remember back when corn was headed to $7? Locking in $4 corn through futures would have seemed like smart, smart money. For those producers that laid that hedge on, they now have to deal with that locked-in input price in the face of declining energy prices.

Ethanol

To understand how falling corn prices and a tough economy have collided in a car crash of Hollywood proportions, you only need to look at model-ethanol company VeraSun. VeraSun, the No. 2 ethanol producer in the country, filed for bankruptcy protection at the end of October, and since then has been going about the business of delaying work on new plants, closing others and working out corn contracts with farmers in an attempt to give the company some kind of a future.

In the beginning of its protected status, the Financial Times reported that, "VeraSun aims to resume normal operations during the reorganization, will continue to pay its employees, not scale back its purchases of corn and other raw materials and ‘has taken steps to ensure continued supply of product to its customers and to fulfill all customer obligations.'"

But recently, a judge in Delaware ruled that VeraSun can renege on some of those corn contracts, and has renegotiated with lenders to provide an additional $196 million in financing as it works its way out of bankruptcy. And that puts a further drag on demand of maize.

In other words, the only thing worse than being a bankrupt ethanol producer right now is being a corn farmer.

Further Reading:

How Much Further Will Corn Prices Drop? An interesting article that talks about the price of ethanol as the driving force for the price of corn.

Comments

[Charlie Peters:]

Corn fuel ethanol stinks

2008 Dec 09 08:48 AM

[update:]

The ethanol SCAM cannot end soon enough.

What GREAT news that VeraSun is bankrupt.

There is justice.

Keep the corn out of our gas tank.

2008 Dec 09 09:24 AM

[Header Tender:]

As a farmer myself, I read these articles with a different perspective. The farm support prices are so far below todays cost of production that they are meaningless. Try getting a loan from a bank based on these supports. Planting decisions next spring will be on cost of production then and market prices.
The ethanol industry is the poster child for not a clue about risk management. Proper hedging of their input cost and hedging the ethanol price should guarantee a profit. Obviously they didn't know how to do this.

2008 Dec 09 03:18 PM

[dsrtwriter:]

While I sympathize with the farmers' plight, all jobs in this country have risks,and many have no subsidies when times are tough.

The silver lining here may be that hopefully this will destroy the stupid ethanol fuel substitute plan and we can move on to using corn as food and feed only, and extracting the natural gas which can power our trucking industry as a start.Trucking accounts for 1/3 of imported foreign oil.

2008 Dec 10 10:19 AM

[Dan S1:]

I was against the ethanol subsidy originally. If it didn't exist, there wouldn't be so many ethanol plants here in the first place.

I formerly worked for an oil company and was against them building the ethanol plant as they got too late a start building it in the heyday in mid-2006. Construction costs for plants was soaring 30 - 40% over normal as many other firms were all competing for the same skilled construction firms to build their plant first.

I'm against almost all government subsidies in general as they are not really pro free market and do not allocate our resources efficiently.

2008 Dec 16 12:20 PM