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Corn Prices Reflect Export Concerns

December corn futures have been on roller coaster ride up and down this year. First it appeared there would be way to much of the grain, and then - because of the rains - maybe too little, and now it feels like the too-little might become just enough.

The just enough to meet the need has put pressure on the market to move lower. This weakness, writes Darrel Good in this week’s online Farm Doc Daily article, is coming from the supply side. There is a general agreement USDA’s corn production forecast will not increase. It, in August, put this fall’s corn harvest at 13.686 billion bushels. Instead, market commentary seems to suggest the trade is expecting the yield forecast to decline by as much as three to four bushels to the acre. So the crop is getting smaller, but so’s the price. It’s about demand says Good.

Continuing weakness in corn prices reflects perceived demand weakness. Concerns about demand may stem from two sources. First is the concern that exports of U.S corn will fall short of the current USDA projection of 1.85 billion bushels. Second, is the concern about slow economic growth domestically and globally.

Clearly, domestic consumption of corn during the 2015–16 marketing year is not of immediate concern. The USDA projection of 5.25 billion bushels of corn used for ethanol production is consistent with the 5.2 billion expected for the marketing year just ending and a modest increase in domestic gasoline consumption next year. The projection of 5.3 billion bushels for feed and residual use next year equals the projection for the current year. Another large crop implies large residual use of corn and low corn prices along with steady to higher animal numbers should support actual feed consumption of corn.

On-the-other-hand USDA projects corn exports during the 2015–16 marketing year that begins on September 1 at 1.85 billion bushels, equal to the projection for the current year. However, total outstanding sales of U.S. corn for export during the 2015–16 marketing year are relatively small says Darrel Good.

It is recognized that the magnitude of early sales is not a good predictor of marketing year exports. Since 2005, sales as of mid-August as a percentage of marketing year exports have ranged from about eight percent (2005–06) to 42 percent (2012–13) and averaged 18 percent. Current sales represent 12 percent of the USDA projection for the upcoming marketing year. Still, the small export sales total is concerning in the context of potentially weak world demand, the relatively strong U.S. dollar, and expectations of large supplies of corn in other exporting countries.

Factually, with nearly 55 weeks remaining until the end of the 2015–16 marketing year, export sales need to average about 30 million bushels per week in order for exports to reach 1.85 billion bushels. Here’s how this all plays out on the farm. Producers will need to evaluate the corn storage decision says Darrel Good. Current low prices mean farmers will likely choose to store much of the crop that has not yet been priced. The current basis in the cash market and the carry in the futures market give some indication about the potential return to storing corn. In central Illinois, for example, the average cash bid for harvest delivery reflects a basis of about -$.30 relative to December 2015 contract and -$0.52 relative to July 2016 futures. Good says if the July basis improves to about -$.05 by June 2016 (as it did this year) the market is offering about $0.47 per bushel to store corn for about nine months.

That return would cover the out of pocket costs of farm storage, but may be closer to breakeven for commercial storage costs for some producers. The only way to capture the storage return, however, is to forward price the stored crop in the cash or futures market. The spot price of corn will have to increase by more than $0.47 by next spring in order for the return on corn stored unpriced to exceed the likely return to a storage hedge.

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