Big Corn Crop May Not Curb Prices
By LAUREN ETTER and BILL TOMSON
March 31, 2007
Strong demand for ethanol and poor spring weather could keep corn prices high over the next few months, even though the government estimated Friday that this year's corn crop could be the largest it's been since 1944.
Fueled by a booming demand for corn-derived ethanol, corn farmers across the nation are expected to plant 90.5 million acres of corn this year, according to the U.S. Department of Agriculture's Planting Intentions report. With projected yields at 152 bushels per acre, the final corn harvest could amount to the largest on record, according to the National Corn Growers Association. At the same time, soybean acreage is expected to be sharply down.
[slideshow promo ethanol]1
AP/Wide World Photo
A farmer unloaded corn at an ethanol plant in Coon Rapids, Iowa, last spring.
The market reacted immediately Friday morning, fearing that a large crop would flood the market with corn. At the Chicago Board of Trade, corn prices fell 20 cents -- the daily limit -- to $3.745 a bushel.
But several factors make it less likely that corn prices will drop much further. Demand for corn-based ethanol is projected to remain strong, especially as more ethanol plants come online in the U.S. and as oil prices continue to hover around $66 a barrel.
There are currently 114 ethanol plants in the U.S., with another 80 under construction, according to the Renewable Fuels Association, the trade group for the U.S. ethanol industry. At the same time, total ethanol capacity is expected to increase to 8.5 billion gallons this year, up from 5.4 billion gallons last year. In addition, corn exports are soaring, which could help keep corn prices high, at least in the near term.
All of that means ethanol will keep soaking up more kernels of corn. Ethanol is expected to consume 3.2 billion bushels of corn from the 2007 crop, compared with 2.15 billion bushels of the crop last year, says Keith Collins, chief economist at the USDA. But Mr. Collins says that while ethanol will continue to "put pressure on our land base to keep finding ways to produce more corn," the crop report is a good sign that corn farmers are responding to market signals and planting more corn.
But planting intentions can be much different than planting outcomes, which won't be clear until the end of June when the USDA releases its next updated planting figures. Over the past 20 years, USDA planting-intention reports have been higher than actual plantings 70% of the time, according to the National Corn Growers Association.
Weather has a lot to do with that. This year, as in every year, there's the lingering risk that bad weather could cut into corn yields. Cold rains are expected to shower the Midwest in the coming weeks, and some long-term forecasts show a generally cold, wet spring and a hot, dry summer. That means farmers might have to delay putting corn seed into the ground by a few weeks, which could ultimately cut into their yields come fall harvest.
Still, some analysts think corn prices will continue to fall. "People in the financial community seem to think that corn prices coming down is in some way something bad," says David Driscoll, analyst at Citigroup. "It's not. Having corn anywhere around $3 [a bushel] is a very good price for corn farmers."
Lower corn prices would be positive for many U.S. industries, including ethanol producers and high-fructose corn syrup producers like Archer-Daniels-Midland Co. Food companies might also breathe a sigh of relief, since more corn on the market could keep them from having to raise shelf prices on everything from cereal to soda pop, which uses high-fructose corn syrup.
For farmers who haven't yet signed contracts to sell their grain, however, lower prices could sour the enthusiasm that has gripped the Corn Belt over the past several months as corn topped $4.
"I wish I had sold some more corn before today," says Garry Niemeyer, a corn farmer in Glenarm, Ill.
For livestock producers, the report is a mixed bag. The livestock industry has complained that high corn prices are cutting into their profit margins, because corn-based feed accounts for one of the largest costs in raising cattle and pigs. While more corn is good for that industry, corn acres have come at the expense of soybeans, which are also a key feed component.
MORE
[Image] • Page One: Ethanol Creates a Pricing Puzzle for Corn Farmers2
03/29/07
• Hot Commodity on Wall Street: USDA's Crop-Production Report3
03/24/07
• Text of USDA report4
(03/30/07)
• Energy Roundup: Ethanol Stocks Not Taking Off5
MARKETS DATA CENTER
• Corn futures prices and charts6
"This is definitely a mixed report," said Bill Roenigk, chief economist of the National Chicken Council. "Much of the increase is coming out of soybeans, also a critical crop for us."
The one near-certainty is that the corn market will be volatile in the coming months. Veteran grain traders warn that newcomers to the agricultural commodities market, like hedge funds and pension funds, could be in for a bumpy ride as weather becomes the determinant pricing factor.
"The way that the funds trade now will be different," says Jim Bower of Bower Trading Inc., Lafayette, Ind. "They're going to have to learn to trade grain now, and it's not as easy as they thought."
Outside the U.S., countries are also responding to market signals by planting more corn. In Brazil and Argentina, corn acreage is expected to expand, which could put downward pressure on prices.
Meanwhile companies that produce agricultural products, like fertilizer and other chemicals, could see their stocks soar over the season as demand for these products increases. Also for seed companies, a big corn crop is good news. Already DuPont Co.'s Pioneer Hi-Bred International unit -- one of the nation's largest suppliers of corn seed -- is sold out of its best corn hybrid seeds.
Write to Lauren Etter at lauren.etter@wsj.com7 and Bill Tomson at bill.tomson@osterdowjones.com8
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