January 24, 2005
CORN PRICES TO CONTINUE NARROW PATTERN?
Corn prices declined sharply from spring
2004 to fall 2004 as the market reflected the size of the
2004 crop. For the past four months, prices have traded in
a relatively narrow range and that pattern may continue for
the next several weeks.
March 2005 corn futures have had a post-harvest high of $2.19
and a low of $1.95. That contract settled at $1.97 on January
21, 2005. The average daily spot cash bid in central Illinois
reached a post-harvest low of $1.695 on November 4, reached
a post-harvest high of $1.935 on January 6, 2005, and was
at $1.835 on January 21. The March basis in that market strengthened
by $.265 since November 4, 2004.
A number of factors have contributed to the continuation
of low prices. Primary, of course, is the large 2004 U.S.
crop. The forecast of the size of the crop increased in each
month of the forecast cycle that began in August. The January
2005 estimate of the crop size was 884 million bushels, or
8.1 percent, larger than the August forecast. At 11.807 billion
bushels, the crop was 1.718 billion larger than the previous
record crop of 2003.
In addition to the larger crop forecasts, corn prices have
been pressured by relatively poor export performance. That
poor performance has been reflected in USDA's forecast for
the total marketing year exports. That forecast was at 2.1
billion bushels in September 2004, but was reduced every month
since then. The January 2005 forecast is for exports of 1.95
billion bushels, only 53 million larger than exports during
the 2003-04 marketing year. Exports during the first quarter
of the marketing year totaled 500 million bushels, 30 million
more than during the same quarter last year, but by January
13 the total had fallen behind that of a year ago. Unshipped
sales as of January 13, 2005 were reported at 282 million
bushels compared to 359 million on the same date last year.
Of the major buyers of U.S. corn, only South Korea is buying
at a faster pace than that of last year.
A third negative factor was the slower than expected rate
of feed and residual use of corn during the first quarter
of the 2004-05 marketing year. Based on the USDA's estimate
of December 1, 2004 corn inventories, 3.32 billion bushels
of corn were used for all purposes during that quarter. Exports
totaled 500 million and food and industrial use of corn was
estimated at 647 million. The residual, assumed to have been
fed, totaled 2.173 billion, only 6 million (0.3 percent) more
than used during the same quarter last year. The USDA currently
projects feed and residual use of corn for the entire marketing
year at 6.075 billion bushels, 4.8 percent larger than last
year's use. The percentage of annual use that occurs in the
first quarter varies several percentage points from year to
year, so that it is a little too early to discount the USDA
projection. However, the estimate of March 1, 2005 inventories
to be released on March 31 needs to show large use during
the second quarter of the year.
The net impact of the changing estimate of crop size and
exports has been an increasing projection of year ending stocks
of corn. The USDA projection was at 1.209 billion bushels
in September 2004 and at 1.96 billion in January 2005, even
thought he projection of feed and residual use of corn was
225 million bushels larger in January than in September.
A fourth factor that has tended to keep corn prices in check
is the general expectation of increased corn area in the U.S.
in 2005. Planted acreage in 2004 was 2.327 million larger
than planted area in 2003 and was the largest since 1985.
Another increase in planted area in 2005 is expected to be
driven by an overall trend of increasing profitability of
corn relative to soybean production in some areas. The trend
reflects generally higher corn yields relative to soybean
yields, particularly in the past two season. Concerns about
the cost of managing soybean rust may push more acres to corn
in 2005 as well. In addition, the USDA's Winter Wheat Seedings
report indicated that seedings for 2005 harvest were down
1.8 million acres from the previous year. That decline makes
room for more acres of spring planted crops, including corn.
If corn area harvested for grain in 2005 is 2 million acres
larger than harvested in 2004, the U.S. average yield would
have to decline below 130 bushels in order to reduce 2005-06
marketing year endings stocks under one billion bushels.
Prospects for adequate to surplus corn supplies will likely
keep corn prices in a narrow range until the new production
cycle begins in the spring. Producer planting decisions and
spring weather conditions will determine if prices can move
higher. Historical patterns would suggest a modest spring/summer
price rally generated by periods of less than ideal weather.
Ultimately, summer weather will have the final say about production
Issued by Darrel Good
University of Illinois