May 10, 1999
WHEN WILL CORN AND SOYBEAN PRICES
The monthly average cash price of
corn in central Illinois dropped below $2.50 per bushel in April
1998 and has remained low since. The average price in September
1998 was $1.775. From November 1998 through April 1999 the monthly
average price ranged from $2.05 to $2.09. Cash corn prices are
at the lowest level since the fall of 1994. December 1999 futures
established a contract low on April 30 and remain near that level.
The monthly average price of soybeans
in central Illinois dropped below $6.50 in March 1998, and traded
to an average of $4.60 in March 1999. Prices have remained at
that low level through early May. Cash prices are slightly lower
than during October 1987 and are the lowest since April 1976.
November 1999 futures traded to a contract low in late February
1999 and are threatening that low again.
Prices have been unable to advance
in spite of threats of planting delays and the endless discussion
of potential acreage shifts and potential yield impacts. The market
is apparently reluctant to read too much into planting delays
in early May, recognizing that summer weather is more important
if crops get planted in a reasonable time frame. The current interpretation
of the La Nina weather pattern is that it is likely to persist
through the summer and provide some extremes in weather, but not
persistent patterns that would significantly threaten U.S. average
yields. The market may also remember that combined acreage of
corn and soybeans could exceed the surprisingly small estimate
in the USDA March Prospective Plantings report.
Reports that late season weather
problems have likely trimmed the size of the South American soybean
harvest; large export sales of corn over the past month; and loosening
of some trade restrictions have provided little price support.
Like many sayings, the old adage that the "cure for low prices
is low prices" only partially reflects reality. Low prices
may increase consumption, but by definition do not increase demand.
Low prices may also reduce production, but not in the short run.
Domestically, low prices in the past often resulted in larger
acreage reduction programs, but such programs are currently not
available. Low prices may also encourage less production in other
parts of the world, but as long as prices exceed the cash cost
of production, acreage cuts are likely to be modest.
Higher prices will require an improvement
in demand, a shortfall in production, or a combination of the
two. For corn, there are hints of some improvement in demand.
An economic recovery in Asia, along with smaller southern hemisphere
crops, may result in a further recovery in U.S. corn exports over
the next year. Efforts to supply the European Union with non-GMO
corn could help revive shipments to that part of the world as
well. Increases in domestic processing uses of corn and likely
increases in livestock prices will help support domestic consumption.
For soybeans, the likely increase in palm oil production may limit
increases in soybean oil exports. Low prices, however, may trim
South American production next year.
Demand-led price rallies are not
common and often occur over relatively long periods of time. Prices
are generally more responsive to a shortfall in production, particularly
in the U.S. Current drought conditions in China may reduce crop
production, primarily wheat, but U.S. production prospects remain
favorable, although it is early in the growing season. If the
1999 U.S. wheat, corn, and soybean crops are large, more serious
attention may be given to acreage reduction schemes for 2000.
While other policy responses will likely be proposed long
term grain reserves, direct income payments, and insurance prices would be most responsive to the potential for a reduction
in production in 2000. Based on discussion to date, the most likely
way to implement a short-term reduction in planted acreage would
be through the Conservation Reserve Program. Although more efficient
approaches are available, they may not be as politically acceptable.
Issued by Darrel
University of Illinois