October 9, 2000
CAN THE RALLY IN CORN PRICES
Corn prices have staged a bit of
a harvest time rally this year, which is an unusual pattern for
a year when production is expected to be large, perhaps record
large. December futures traded to a low of $1.87 on September
19, only $.015 above the contract low, and traded to a high just
over $2.06 on October 4. The average cash price of corn in central
Illinois increased by $.24 during that period, as the basis strengthened
by $.05. The rally reflects the market's anticipation that the
U.S. crop is smaller than the USDA's September estimate of 10.36
billion bushels and that the Chinese crop is smaller than the
current estimate of 4.53 billion bushels.
In addition, the September 1 Grain
Stocks report released on September 29 revealed smaller inventories
of corn than had been projected by the USDA. That smaller estimate
implies that feed and residual use of corn during the 1999-00
marketing year exceeded the projected level and that the projection
for 2000-01 will be increased. Increasing ethanol production may
also require an upward revision in the projection of domestic
processing use of corn. Finally, expectations of a smaller estimate
of the domestic sorghum crop, tightening world wheat stocks, and
dry weather in U.S. hard red winter wheat areas have provided
underlying support to corn prices. The market believes that domestic
corn stocks at the end of the current marketing year will be well
under 2 billion bushels, compared to USDA's September forecast
of 2.24 billion. Stocks could tighten even more during the 2001-02
marketing year if producers reduce corn acreage in response to
the higher cost of inputs.
The question is whether the counter
seasonal price increase over the past three weeks is the beginning
of a more significant price recovery or just an early version
of the typical post-harvest recovery? The USDA reports to be released
on October 12 will go a long way in answering that question. The
market will be most interested in the revised estimate of the
size of the U.S. crop. Most private estimates appear to be between
10.1 and 10.3 billion bushels, but a few guesses fall on both
sides of that range. Second, the revised estimate of the size
of the Chinese crop will have important implications for U.S.
exports and the magnitude of stocks at the end of the current
year. With a 10.2 billion bushel crop estimate, this week's projection
of year ending stocks might be near 1.95 billion bushels.
It appears that corn supplies will
be ample during the current marketing year, so that significantly
higher prices may have to come from longer term developments.
Some still argue that "low prices cure low prices" so
that it is only a matter of time before prices recover. In fact,
the most that can be said about low prices is that they increase
consumption. As long as production remains large, it is difficult
to generate and/or sustain higher prices. Having said that, it
is still important that consumption remain at high levels to prevent
a burdensome build-up in inventories. Maintaining stocks at a
modest level leaves the door open for price rallies based on U.S.
or foreign production concerns over the next several months.
What to do? With prices still at
a very low level, it appears highly likely that prices will trade
at higher levels sometime during the current marketing year. The
central Illinois cash price of corn has traded in a $.24 range
since September 1. That range will likely be expanded to at least
$.60 by the end of the marketing year. The low of $1.51 is not
expected to be violated until perhaps next summer, if at all.
The cash price should be expected to move over $2.10 and probably
over $2.20 sometime during the year, most likely next spring or
If this week's Crop Production report
confirms a prospective crop in excess of 10.2 billion bushels,
futures prices will have difficulty moving above the recent high.
Additional basis strength, however, would be expected so that
hedging part of the stored crop could earn a premium over storage
costs. Under this scenario, unpriced corn would likely have to
be held until spring to earn a return on storage.
If the October Crop Production report
shows a surprisingly small crop, further price strength would
be anticipated. Under the unlikely scenario of a major downward
revision in both the U.S. and Chinese crop estimate and a significant
increase in the projection of consumption, December futures would
attempt to fill gaps near $2.20 and possibly $2.30. Such a rally
would offer early opportunities to price more of the 2000 crop
and to initiate sales of the 2001 crop. Sharply higher prices
might encourage corn acreage in 2001, even with higher costs of
Issued by Darrel
University of Illinois