One billion bushels from the 2010 crop might be considered AWOL. At the outset of the crop year, the production projection was 13.5 billion bushels, but only 12.477 billion bushels were harvested. What happened to the additional one billion bushels of corn? But in addition to the overestimate of US production, was a possible underestimate of the demand. And the two factors in the corn market have resulted in rising corn prices, demand rationing, and higher prices for food and other products made from corn. Our supply of corn at the end of the marketing year will be the equivalent of three weeks of use, but what happens if the 2011 crop also falls short of our needs?
What will happen to market prices, end users, and farm policy if 2011 produces a short crop? Or just a trend yield? Or an abundant crop? Those three scenarios are evaluated by University of Illinois economist Darrel Good and Scott Irwin. They contend, “The bottom-line is that we believe the risk of weather-induced shortfalls in corn production may be greater than generally perceived, suggesting that market participants and policymakers may be ill-prepared to cope with such a shortfall should it occur.”
One of the initial challenges is to determine what a trend yield might be. Good and Irwin go back to 1960, instead of using the more popular data from 1990, but they say yields have not changed appreciably, but that adverse weather has occurred less frequently since the 1990’s and the long term trend is still relevant. Consequently they arrive at 158.4 bushels as the trend yield for 2011. To arrive at good and poor yields, they excluded the yield from the 1988 drought and the 1993 flood. For the lower yield scenario, they use a range of 134 to 153 bushels and for a high yield scenario they use a range of 166 to 174 bushels. Good and Irwin use 92 million acres as the planting extent for the 2011 corn crop, despite “substantial uncertainty.” That would put harvested acres at 84.9 million, and multiplied by the trend yield would produce a crop of 13.414 billion bushels, with a total supply of 14.099 billion which is smaller than for the current marketing year. A good yield would provide a crop of 14.348 billion and total supply of 15.033 billion, while a poor crop would produce a 12.48 billion bushel crop with a total supply of 13.175 billion.
The economists say consumption is difficult to project because prices can cause demand to vary substantially. They say feed consumption for livestock is more responsive to price than other uses such as exports or biofuels. Subsequently, any increase or decrease in corn use will occur in the livestock feed numbers. Good and Irwin say projection of corn use for ethanol is complicated beyond the minimum amount needed to meet the federal mandate for biofuel production. Beyond the 4.4 billion bushel minimum, actual use could approach 5 billion unless it becomes uneconomic to blend. They say their judgment is that ethanol production breakeven prices would be sufficiently high enough to continue production and use with crude oil prices above $95 per barrel.
The best estimates for consumption offered by Good and Irwin are 4.9 billion bushels for ethanol, 5.1 billion bushels for feed, 2.0 billion for exports, 1.4 billion for other processing, and 5% ending stocks at 674 million bushels. Their good weather scenario would result in more consumption, more stocks and lower prices, with an average farm price of $4.75. The poor weather scenario would curtail some export and domestic processing, with ethanol consuming 4.8 billion bushels and 4.5 billion for feed use, and total consumption limited to 12.55 billion bushels. Under those terms, the average marketing year price would be $7.
Good and Irwin say such a high corn price under a poor weather scenario would call for policy initiatives to alleviate the economic impact on consumers and the industry. They say export restrictions have been taken in the past, along with discussion of opening up the CRP for production. They rhetorically ask if additional options might be considered in the case of a shortfall in production or allocation left solely to the market? If corn use was to be restricted they say the process would be complicated and the impact would not be immediate. They add there is little precedent for restrictions outside of wartime, but they say any policy response should be implemented early and enforced in a straightforward manner.
With the current corn carryout limited to5% of use at most, questions arise about whether the 2011 crop will be large enough to loosen up the tight stocks. A shortfall in production that might produce less than 13 million bushels would result in the need to reduce exports and possibly ethanol production. Such policy changes would have to be implemented early and fairly.