November 6, 2000
WILL THE CORN MARKET REPEAT THE
PERFORMANCE OF 1994-95?
December 2000 corn futures established
a contract low of $1.855 on August 2000, but moved to a high of
$2.14 on November 3. The December basis in Central Illinois has
strengthened from -$.40 in early August to about -$.16 on November
3. The average spot cash price or corn in central Illinois increased
from $1.51 on September 19 to $1.97 on November 3. The sharp recovery
in prices have some wondering if prices will continue to recover
in a fashion similar to that of November 1994 to July 1996.
In 1994, corn production was a record
large 10.1 billion bushels. Prices bottomed a little later than
this year as the large crop was not fully anticipated. The lows
were also higher than this year's lows. In that year, the cash
price in central Illinois established a low of $1.845 on October
25 and December futures bottomed at $2.105 in November. Prices
increased steadily, with the central Illinois cash price peaking
at $5.25 on July 11, 1996.
A number of fundamental factors
contributed to that remarkable price recovery. First, corn demand
was stimulated by a robust world economy. Domestically, surging
hog prices helped maintain feed demand for corn. Second, harvested
acreage of corn for grain in the U.S. declined by 7.3 million
acres in 1995 due to the implementation of a set-aside program.
Third, the U.S. average corn yield declined by 25 bushels per
acre from 1994 to 1995. The combination of less acreage and lower
yields resulted in a 1995 crop of only 7.4 billion bushels, 3.6
billion smaller than the 1994 crop. Fourth, foreign grain production
was also small in 1994-95 and 1995-96. Foreign coarse grain production
declined from 613 million tons in 1993-94 t0589 million in 1994-95
and recovered to only 592 million in 1995-96. The sharp decline
in 1994-95 came in the former Soviet Union, China, and South Africa.
Production continued to decline in the former Soviet Union in
1995. Foreign wheat production declined from 494 million tons
in 1993-94 to 461 million tons in 1994-95 and recovered to only
478 million tons in 1995-96. The sharp decline in 1994-95 came
in the former Soviet Union, China, Canada, and Australia.
As a result of the supply problems
in 1994 and 1995, world wheat consumption was reduced by about
15 million tons annually and world inventories declined by about
34 million tons from 1993-94 to 1995-96. Foreign coarse grain
consumption remained large during that period, but consumption
in the U.S. declined by about 28 million tons from 1994-95 to
1995-96. World stocks dropped from 136 million tons at the end
of the 1994-95 marketing year to 99 million tons at the end of
the 1995-96 marketing year. Strong world demand required prices
to go to extremely high levels in order to curtail consumption.
For the current year, there are some fundamental similarities
to 1994-95. Foreign wheat and particularly coarse grain production
are down sharply from production of last year. The largest declines
have occurred in China and Australia for wheat and China and Eastern
Europe for coarse grains. Those shortfalls, particularly in China,
are expected to fuel a sharp recovery in U.S. exports of corn.
Domestically, higher fuel prices are expected to support an increase
in corn used for ethanol, while feed use of corn will be supported
by a modest expansion in broiler and pork production.
The major uncertainties, as usual,
are associated with the likely level of U.S. and world grain production
next year. U.S. corn acreage may decline slightly due to higher
production costs, but average U.S. and world crop yields are not
predictable. Additional shortfalls in production next year would
extend the current infant price rally.
A second scenario, more like 1997-98,
is possible. In 1997, corn prices also rallied sharply at harvest
time in the face of a second consecutive large crop. Prices were
much higher than current prices, but the cash price in central
Illinois peaked at $2.77 on October 22 and declined steadily to
a low of $1.665 on August 31, 1998. The harvest time rally that
year was not fully supported by fundamentals and prices collapsed
as the Asian economy sank and U.S. and foreign grain production
remained large in 1998. Given the current low level of prices,
a price decline of the magnitude of 1997-98 is not possible, but
the pattern could be similar.
Most likely, of course, the 2000-01
marketing year will differ significantly from both 1994-95 and
1997-98. Currently, there seem to be more similarities to 1994-95
on the demand side. The big questions center around supply. Answers
will start coming with the USDA's November 9 Crop Production report.
To sustain the current rally, that report will have to at least
confirm the market's expectation of a smaller 2000 corn crop.
University of Illinois