If you want to know how a market is apt to behave, search back in history for a time with similar circumstances, and you are likely to find a model to use for making forecasts. As we move into the corn harvest of 2014 with the exceptionally high yield expectations predicted by the USDA, and a corn crop which is anticipated to be over 14 billion bushels, we only need to look back 12 months in order to find a model of how this year’s corn market is apt to behave. 14 billion bushels of corn is no longer an exceptional supply. In fact, it might even get to be routine.
The purpose of price is to ration demand. Simply put, it means that in times of limited supply, (like the drought of 2012), the price needs to rise high enough to discourage some users out of the market, and in years of large supplies, like 2013 and 2014, the price needs to be low enough to entice new demand into using the commodity so that stocks are fully utilized.
In the fall of 2013 North America harvested the largest corn crop of all time coming in with a total supply of just a hair under 13.925 billion bushels. By mid-September of 2014, old crop corn basis levels in the Great Lakes basin are near record all time highs because we’ve essentially used it all up. So if you are trying to figure out where prices have to be in order to consume this year’s corn crop, you’ll only need to look back over the past year’s market. If we just finished up a year with 13 billion bushels of corn demand, do we have any reason to believe that we can’t do it again?
Without being overtly negative, there are a few “flies in the ointment” in anticipating a perfect repeat of the past 12 months of corn pricing. The most notable difference is that we didn’t totally use up all of last year’s production, and ending stocks have risen slightly. Coming off the 2012 drought shrunken crop, corn ending stocks at the start of the 2013 crop year were 821 million bushels, 12 months later, they had risen to 1.181 billion bushels. The stocks to use ratio is still a comfortably tight 8.5 per cent, but it certainly isn’t a desperate as it was when we entered the previous crop year. The September USDA report estimated corn production about 300 million bushels higher than its August report estimate. (August’s estimate was dead in line with 2013’s total production). It remains to be seen if the high yields can keep up as corn harvest progress moves north on this colder than normal summer.
The bottom line, however, is that demand remains exceptionally strong. The areas of excess supply, and the areas of highest demand are not in the same geographical location. The cheap corn, (the areas of more supply than demand), are largely west of the Mississippi and further north. The Great Lakes basin is a region where demand outstrips supply, and we actually import corn from the zones of excess supply. Expect to see a poor correlation between the Chicago futures price and the Ontario cash values.
We spent most of the summer of 2013 talking about the record corn crop developing in the field and watching cash prices plummet. On September 20, 2013, Farm Market News reported the cash bid for new crop corn at $3.81/bu. 364 days later, today that price is $3.66/bu. Last year, we set the lows before the start of harvest, and considering the similar market situation in 2014, we should expect to see the price curve maintain the same shape. Depending on exactly how big the 2014 corn supply turns out to be, we may stay slightly below last year’s values, but the map of the marketing road ahead should be clearly embedded in everyone’s memory.