Do We Really Need Those Increased Corn Acres Next Year?

Informa Economics came out last week and pegged the US corn crop at 11.07 billion bushels.  They pegged the US soybean crop 3.11 billion bushels.  Both estimates were more than the Aug 11 USDA crop production reports.  Coming up on September 12th, we’ll get to see the new numbers from USDA.  Will these already huge crops get bigger?

Informa’s numbers surprised the market.  There was a bit of conventional wisdom throughout the Corn Belt that the crop might shrink.  In fact I’m sure if you looked hard you could read that on some of these DTN pages.  The bottom line is whatever the USDA says on September 12th, we’re still looking at an approximately 11 billion-bushel crop.  There has been only two bigger than that, last year and the year before.

New crop cash prices for soybeans this week are about $5.30 bushel, corn is $2.45.  So for Canadian producers it is not the best of times.  Feeding that corn to livestock is probably one of the better options.  However, not everybody can do that.  Right now the industrial complex must think it can’t get much better.  Remember, for ethanol you need a lot of cheap corn.  Right now that’s exactly what we have.

We all know what that means especially with no safety net for grain and oilseeds.  Farmers have adjusted the best way they can.  Some are going to store that corn until the ethanol gold rush hits next year.  Others may have contracted for $3 plus prices last winter. Of course nobody really knows what might happen.  In 2006 it’s an especially risky venture growing corn.  Everybody seems to be looking at those outward futures months, which give clues for better times ahead.

Soybeans are another issue.  How many soybeans are a lot?  How about a 500 million bushel carryover with that big 3.11 billion bushel crop coming out of the field?  There are seemingly “beans everywhere.”  However, maybe not as many soybeans in Brazil.  A rising currency and soybean rust has taken the luster off their soybean potential.  Having said that, stocks are still very onerous.

As we all know it has put cash prices at levels, which are unsustainable for producers.  I have made that case several times in the past in these pages.  I have also made it unofficially to some of my sources within the agricultural bureaucracy.  It’s interesting the comments I get.

The one common refrain I get from anti-RMP (Risk Management Program) bureaucrats is “If you can’t make money growing corn, don’t grow it!”  I hear that often.  The question is how do you answer it.

My common refrain is that farmers don’t know the price of corn when they plant it.  There are many risks inherent with growing corn from the time it’s planted in April until its harvested in November.  Ditto for almost any other crop.  So at the end of the day farmers grow these crops profitably in the long run.  The problem is the short run when agricultural prices tank.  That’s where we are now and that’s why we need some type of safety net.

However, it boils down to something much more basic than that.  In agricultural economic terms its called the “inelastic demand” nature of our commodities.  In short that means small supply shifts can often cause huge farm cash price changes.  With the nature of over supply in agriculture it is a constant problem.

This is a no-brainer for any bureaucrat working in agricultural policy.  It’s a tenant of the agricultural economic genre which I use daily.  “Not growing corn” might seem like a reasonable response to low prices but because of the nature of our agricultural economics, it makes no sense.  What are we suppose to do?  Put big fences around millions of acres and grow pasture?  Get real.

With cash prices this low there is also the common refrain within farm country that we need more corn acres next year to satisfy the growing demand for corn.  This is not really true although I totally understand why it’s become conventional wisdom.  The reason it is not true is because its true we need those corn acres to satisfy increased demand, but only at current price levels.  In other words if we don’t get the acres or if those acres don’t produce we’ll still satisfy demand, only at higher prices levels.  It’s an important distinction, one that I think many people are missing.

So does this mean the price of corn is going up, way up!  Well, we’ll see.  The September 12th crop report is the next major market mover.  Add a freeze after that and you never know.  But keep in mind as you get those combines ready.  There are some basic agricultural economic laws working themselves out here.  No, its not for the faint of hear.  Prices are cyclical; demand for our commodities is inelastic.  Finding your way in this maze is the challenge.