Farmers' 'Wise' Corn Planting Decision: When Less is More

Yesterday's USDA estimates reflect a couple of "wise" decisions made by the U.S farmers in their planned allocations of land for grain commodities.

As is well known, soy acres have increased tremendously this year.

My wonderment is for the 86 million acres of corn, down from the 93 million planted last year. Why is this level of planting a "wise" position? A few facts:

1) With the all the noise about ethanol production in 2007 projected to be 7.5 billion gallons ethanol, the latest tally estimate is 6.8 billion gallons - i.e. 700 million gallons short of forecast. Now this represents approx 250 million bushels; at 150 bushels/acre, this is 1.6 million acres planted in 2007 which can now be used in 2008. So 86 millions in 2008 is completed to 87.5 million, just on this basis.

2) Where else do we see this extra corn supply? As of end of March 2008, corn in inventory is 7.0 billion bushels -- which is 1 billion bushels above March 2007. A quick calculation again shows that 1 billion bushels in inventory is approximately 6.6 million acres of corn land. So add 86 million to 6.6 million = 92.5 million.

This is about where we were in planted corn supply in 2007 plans.

Now that we know that we DID NOT USE AS MUCH CORN IN 2007 as was forecasted, and the 2008 planting season is adjusted, let corn price come down to a reasonable level: $4.50/bushel? A fair price for the farmers to still make a lot of profits.

Disclosure: Author holds positions in the above-mentioned stocks.

Comments

[haydete:]

It could also be confounded by importing ethanol and using other feedstock beside corn to produce ethanol.

2008 Apr 01 08:10 AM

[Nick Gogerty:]

Corn depletes soil nutrients which is mitigated with fertilizer (anhydrous etc.) or crop rotation. Increased fertilizer prices, increased soybean prices and the choice of rotating crops all make sense to rotate the crop thus diminishing last year record acreage allocation. Hint the crop report is an early indication, rains in late April or May, significant Bean declines could change the actual behaviour from the declared intentions in the USDA report.
Having worked in the Iowa corn and bean fields growing up, traded commodity futures as a teen and now working with a fund in New York lets a fella see the whole cycle.

2008 Apr 01 11:03 AM

[Mark Anthony:]

Eddy:

You presented a quite some very useful and important numbers. But can you please cite the source of those numbers so others can cross check for their accuracy? Thanks. Please read my articles on genral resource investment topics:
seekingalpha.com/autho...

2008 Apr 19 07:59 AM