The Outlook for Corn

By Julian Murdoch

A bleak headline from Bloomberg greeted farmers and commodity investors alike last Thursday morning:

"Corn Prices May Enter Decade-Long Slump, Agency Says"

It's not often the government declares your business in the toilet. The forecast comes from data prepared by the Congressional Budget Office (CBO) for its annual budget report - this year's pithily titled "The Budget and Economic Outlook: Fiscal Years 2009 to 2019." You won't find a single mention of corn, agriculture or even the farm bill in the report, but that doesn't mean the numbers aren't underneath all the malarkey.

If you look through the supplementary documents, you'll see where Bloomberg got its depressing headline. Because corn subsidies are a not-inconsiderable expense for the U.S. taxpayer, the CBO essentially has to make a prediction. And the agency is forecasting corn's average price to hang out between $3.65 and $3.94 a bushel between 2010 and 2019. 2009 is forecast to average only $4.02. In other words, the government thinks corn is staying flat or trending down over the next decade. If you're a farmer (or investor) counting on $5+ corn, that's a big ouch.

Granted, budget numbers can vary between stringently realistic to worst-case-scenario-type planning, but considering the ride corn has been on in the past year, the forecasted prices seem pretty low.

Corn averaged around $5.16 a bushel in the past year, closing at a high of $7.27 on June 27. If the government's forecast is accurate, the effects will be considerable.

$4 Corn

While still not exactly cheap, corn under $4 does have its positives.

First off, ethanol plants will see their costs come down, assuming there are any ethanol companies around to take advantage of the prices - the largest, VeraSun (VSUNQ.PK), is currently in Chapter 11. With gasoline prices back near 2005 levels, demand for ethanol has (unsurprisingly) fallen off. Even though corn prices have dropped to almost half of their record high, ethanol manufacturers are closing plants and cutting production, as the price for their product is dropping faster. The combination of low demand and the high corn contract prices they had to accept in the summer killed their margins. If corn stays cheap enough long enough, however, it could turn the ethanol market around.

Also on the plus side: Lower corn prices translates to lower feed prices, which eases the cost pressure on livestock feed lots. Of course, in slim economic times, demand for expensive meat goes down, but the ease in feed costs may give meat producers a little more flexibility in riding out the slim times without having to decimate their herds to save money, which is where things were headed with corn at $7.

On the negative side, with prices forecasted this low, it may be too expensive to actually plant and harvest a crop. From Reuters on Friday:

"We can't afford to raise the crop," said Indiana [Farm Bureau] president Don Villwock. "Prices are below the cost of production for corn and soybeans."

Input costs are up all over the board - from land costs to seed to fertilizer, farmers are having to make a lot of decisions right now on where to spend their money on their next crop - and just what that crop will be. Again, from Reuters:

Farmers are waiting far longer than usual to decide which crops to plant, said South Carolina president David Winkles. "There is so much uncertainty of what you can pencil in for a profit," Winkles said.

Some of that uncertainty is due to uncertainty in input costs. Seed costs are high -- Monsanto (MO) is raking it in -- as are fertilizer costs. In fact, fertilizer costs may be heading higher just as crop prices are coming down, due to, of all things, the conflict occurring between Russia and Ukraine about natural gas. The gas that flows through Ukraine flows to 18 countries. With cold weather affecting the area, activities that require high energy input, like fertilizer production, are being shut down.

Nitrogen production in particular, in countries like Poland and others, has been reduced, and in some cases shut down completely. There is some concern about a coming nitrogen shortage and corresponding price increases. While recent news suggests the disagreement will settle down, the local uncertainty is far from settled.

Not exactly a fun time to be a farmer.

Where Are We Now?

On Monday, the USDA will be releasing its final production numbers for 2008 for agricultural products like corn and soybeans - and the numbers are likely to be low. 2008 was plagued with a slow start due to planting delays and flooding. Crops seemed to recover during the summer only to be hit with harvesting delays that may have meant a lot of corn left in the field unharvested.

The lower harvest numbers could mean good news for prices going forward, something that farmers are going to need as they deal with the reality of planting for this year, and the forecasted tough times ahead. But until we get a better sense of the planting numbers (still months away), we won't know what 2009 will hold.

And until we have a feeling for 2009, looking out to 2019 will be quite a stretch indeed.

Comments

[ValueInvestor:]

Surprise, Surprise, the analysts were wrong.

"For corn, the average of all analysts' estimates is 11.982 billion bushels, according to Dow Jones Newswires, in a range of 11.880 billion to 12.078 billion. Only four of the fourteen analysts surveyed by Dow Jones see corn at or above 12 billion bushels."

Well seeing how the USDA report pegged corn at 12.101 billion bushels it seems that all 14 analysts were wrong.

Jan 12 05:00 PM

[ur2smrt4me:]

other related stocks: JJG, JJA, RJA, SYT

in the long term agricultural commodities prices will have to go up, with inevitable shortages of soil and water, and higher energy costs, and inflation

Jan 12 07:29 PM

[Farmer Bob:]

I am a farmer and Crop Insurance agent, in the western corn belt. The USDA report,which most of you live and die for, could well be wrong. There is more corn in the bins than most years, The yields have yet to be compiled in the real world. As a Federal crop insurance agent, I can tell you, a lot of farmers are not divulging the amount of corn they have on hand until the last possible moment. Regional elevators (corn Buyers) and ethanol plants are struggling to get farmers to bring the grain in. Local ethanol plants are paying premiums over CBOT just to keep enough corn on hand to run the plants. Most of the corn in the on- farm storage has not been priced. Yes, there is still unharvested corn,and snow will prevent much of it from getting harvested before late spring.

It has been a tough year, logistically,weather wise,financially. The future looks even more uncertain. Credit is tight,inputs are high.

The plans on my farm include buying enough seed to swing corn or bean acres either way at the latest possible date. The winter wheat has been planted, with the snow cover,it should survive and do well.

This is not an easy business, and ,It is my belief that speculators pushed the commodity prices far outside the parameters of supply and demand, which has now caused entire industries into survival mode (ethanol,cattle producers)

Real people are losing jobs,careers,homes, over the irresponsible actions of huge speculators. Speculators should get a real job.

Monsanto and the fertilizer industry took the opportunity to set themselves up for huge profits also, but the farmers have balked at paying astronomical prices, and these markets are feeling that now.


If anything should be learned from 2008, the year of BIG swings, BIG is not always better. Speculators,banks,seed companies may have gotten too BIG, controlling the market only works for a while, then the bloodshed comes.

Good luck to all of you, you will need it, as wil I.

Jan 12 11:40 PM

[Andy1234:]

Its not speculators who are handling these markets.

Its government policies and the ability to access money at low interest rates.

The root of almost every "free market" problem lies in policies or money supply.

With a currency that has depreciated over 96% since 1913 or the year the fed reserve came into existance.....whenever you have a group controlling a money supply backed by nothing....everyone becomes a speculator just to maintain the purchasing power that you have saved.

The problem is government and their policies....and the fed reserve.

Jan 13 08:45 AM

[Farmer Bob:]

Liquidity was the problem, and that has been severely curtailed. Speculators have moved on, the commodity markets are not generating the returns the greedy specs need.
They will be back.
I agree the govenrment policies and money supply is the deep underlying root of the problems.
Oil is in the same situation, the big difference between oil and ag commodities is the yearly growing cycles,and the weather factor.

The drilling for oil in less profitable conditions will grind to a halt, that kind of oil exploration takes real venture capital, and of course the sources of venture capital have dried up too.

I think the worst is yet to come, policy, and regulation will help, but it is going to be a rocky road.

Looking forward with caution

Jan 13 11:27 AM

[AndyMan:]

If you back the currency with some sort of value...like gold.....you essentially lock most commodities down.

There wouldn't be much price swings from yr to yr....and people like you and me wouldn't have to speculate on stocks to maintain the purchasing power of our dollar if we decided to save.

a dollar now would be a dollar 20 yrs from now.


You would eliminate every bubble scenario....there would be no depression in the 30's....no tech bubble or housing bubble, (atleast nothing nearly as large). Interest rates should be controlled by the market. Austrian economics work.......its this cheap money fake money coming into existance backed by nothing along with horrible government policies which create the largest bubbles in history.

This is an all out paper war between countries......

Jan 13 05:18 PM