With corn and soybean harvest wrapping up and yields coming in lower than many projected earlier this summer, particularly for corn, the supply/demand situation has become much tighter, says Darrell Mark, University of Nebraska Extension livestock economist.
The stocks-to-use ratio on corn, now at 6.7 percent, is the tightest since 1995/1996, and USDA has projected ending stocks at 902 million bushels for the 2010-11 marketing year.
Until final yield numbers for the 2010 crop are known (in January 2011) and the final production numbers for 2011 are in next year, perception will be key in establishing corn price, Mark says. “With a very tight corn supply/demand balance, the market is going to be ultra-sensitive to 'scares' related to next year's production. We hear prognostications that we will see $6, $7 and even $8 corn. Any of these price levels can be possible in the short run if the right combination of these 'scares' occur.”
“This clearly implies some 'rationing' has to take place since we won't have another corn crop for another 12 months,” says Mark. “So, we will have a lot of risks associated with the next year's supply. Will yields be high enough? Will acreage be large enough? We will be very susceptible to all those risks throughout the 2011 growing season.”
Mark notes that rationing will come from one of the three main consumers of corn: the livestock sector, the ethanol sector, or the export market. “In the October WASDE report, USDA actually increased feed demand, maintained ethanol demand, and slightly lowered export demand compared to last month,” he adds. “The dramatic price increase we've seen since that report came out, though, has quickly eroded livestock profits which eventually translates into reduced corn demand from livestock producers. Certainly, it is going to curtail some expansion plans for cattle and hog producers.”
Because perceptions of shortages and potential production risks for 2011 will heavily drive prices in the next year, Mark suggests that pork producers employ a maximum price strategy, or own cash corn. “We are currently experiencing a relatively weak basis, which make cash purchases relatively more attractive,” he says.
Mark suggests a cash buying opportunity may present itself if the market takes a "breather" from the recent rally. The problem is, of course, for the livestock producer to identify these kinds of prices levels as "attractive."
While they may not be profitable input price levels, the prospects for significantly lower corn and meal prices appear slim right now. So, owning some of the cash needs now and employing maximum price strategies for feed inputs through at least the first half of next year are important for pork producers to consider for managing risk.
Mark sees the possibility for an aggressive acreage battle early in 2011. “Corn and soybean prices are high and profits are going to help 'buy' acres. However, profits in other commodities are looking excellent for 2011 as well.” High wheat prices and record high cotton prices will make it hard for corn and beans to receive sufficient acreage commitments.
Therefore, the balance sheets will remain tight through the 2011 growing season, which will lead to heightened sensitivity to weather risks through the summer months. Increased ethanol usage and expansion of E15 will also add to the uncertainty on the demand side.