It could be worse than we thought. With record corn production in a year with heavy spring rains and late planting problems, the price drop in recent weeks suggests that corn demanders see the crop-reducing effects of 2012 drought as an aberration—since apparently improved seed genetics successfully protected 2013 corn production from moderate drought and planting problems.
Compared to the 2012 corn crop, the November WASDE reports record production, increased crop utilization—both domestically and internationally—and the year-ending stocks increasing by nearly 1.2 billion bushels of corn. The result is a projected season average corn price received by farmers of $4.50 per bushel for the 2013 corn crop, a drop of $2.93 per bushel from a year earlier.
For most farmers, even on the most productive land, $4.50 is getting frighteningly close to their cost of production—and for some-to-many land costs would not be covered. This leaves little margin on the downward side before things get really scary.
And scary it might be. While recognizing that we are talking about the outer edges of the US corn belt, on November 18, 2013 DTN Ag Policy Editor Chris Clayton reported that “DTN’s market tracker shows corn for delivery selling as low as $3.17 a bushel in northeast Montana.” He also said, “DTN’s Market Tracker shows corn prices below $3.70 in parts of the eastern Corn Belt, notably throughout parts of Michigan and Ohio. Farther west, prices throughout North and South Dakota are hitting lows below $3.40 a bushel in some places with prices averaging more around $3.50 a bushel.”
Can it get any worse? We think that is a distinct possibility.
Consider the following scenario, suppose that: 1) the USDA has underestimated the corn crop by 100 million bushels and 2) it has also overestimated domestic and export consumption by 200 million bushels. And, as we have further considered the November WASDE numbers, those possibilities seem very real.
If that scenario comes about, total use would decline to 12.750 billion bushels and the 2013 year-ending stocks for corn would increase to 2.187 billion bushels, resulting in a year-ending corn stocks-to-use ratio of 17.2%.
The last time we saw the year-ending stocks-to-use ratio at that level was 2005, just before the ethanol boom took off. The price was $2.00 per bushel. As unlikely as that price may be, given today’s production costs, that price would be devastating. Even if the price fell to $3.00 because of forward contracting and other pricing strategies, the effects would still be devastating.