December corn futures closed Wednesday at $5.73, again knocking on the door at #6 Dollar St. That is the second time they have pushed in that direction since the October Crop Report cast doubt on yields, and reduced the 2011 carryout below one billion bushels. The price of the commodity matters only to the record keepers and benchmark traders, the real top of the market will occur when corn prices begin to ration its use.
Price rationing last occurred in 2008 and it is reasonable to wonder if the current price spike will be a repeat. North Dakota State University marketing specialist Frayne Olson says no one knows the answer, but lists some key factors that will influence how high prices will go.
Ending stocks. That was one of the most important numbers in the October Crop Report, which estimated carryover next August at 902 million bushels which would be a stocks to use ratio of 6.7 percent, still above the record low of 5 percent in 1996 when corn prices climbed above $5 and hedge-to-arrive contracts became a household word because of the trouble attributed to them. Olson says the small amount of reserves causes uncertainty and pushes prices toward the rationing point. In that area, end users begin to halt purchases and look for alternatives or halt their operation altogether. Feed uses 40 percent of US corn, ethanol uses 35 percent, and 15 percent is exported. Each sector will have a threshold point and when that point is reached Olson says that will determine the upper range of corn prices.
Livestock feed. Livestock feeders prefer corn, but have been creative in recent years in development of alternative feeds for livestock, which also rises proportionately with the feed value of corn. Olson says the first move is switching to an alternative, and then culling underperforming animals. That increases meat in the market, but reduces demand for corn and related feeds. The final move comes as producers exit the business. Currently, dairy, pork, and poultry are coming out of sustained losses; and operators’ plans may continue, despite the potential for further contraction of those industries.
Ethanol fuel. Financial stress has beset this industry, which has been financially restructuring. Olson says corn costs make up nearly 70 percent of the total cost of production, so corn prices will have a major impact on corn refiners. He says the relationship between ethanol prices and corn prices is a key element in determining how much an ethanol processor can comfortably pay for corn. Olson says, “As long as ethanol prices rose faster than corn prices, ethanol processors could afford to pay for the increased cost of corn. However, the current price relationship between corn and ethanol makes it difficult for ethanol processors to bid for corn aggressively. This suggests that ethanol processors may begin cutting production if energy prices do not keep pace with rising corn prices.”
Export levels. The variability of the dollar in relation to other currencies makes exports difficult to determine, particularly in volume, as well as what level exports would diminish if prices rose to that point. Olson says in 2008 most analysts expected corn exports to diminish as prices increased, but that did not happen because the low value of the dollar eased the increase for those buyers. At that time the US dollar index was 70 to 75, and currently it is 77 to 80. The drought in Eastern Europe is a major export enhancer because of the global need for livestock feed and the Russian ban on feed exports due to the drought. Olson says given the weak economy, how high will food and feed prices rise before consumers shift their purchases to alternatives.
Bottom line. Higher corn prices are a possibility, but they may not make the 2008 peak. Olson says, “The ability of the key users of corn to pay those prices has changed.” He says that because for livestock producers the limiting factor is how much consumers can pay for meat. For ethanol producers, the limiting factor is how much motorists are willing to pay for gas. For Exports, the limiting factor is the value of the dollar, and if it remains low, it moderates corn prices.
Corn prices have climbed into lofty areas just under the $6 per bushel mark, but whether they make it is a moot point. They will climb as high as needed until prices ration the corn supply. For livestock producers the level will be determined by retail meat prices that are too high for consumers. For ethanol producers, the level they can pay will be determined by how much motorists can pay for gas. And for foreign buyers, the value of the dollar will determine how much they are willing to pay for livestock feed.