CORN MARKET OUTLOOK

AAEA ANNUAL MEETINGEXTENSION CROP OUTLOOK SESSIONJULY 25, 2011

Daniel O’Brien

Extension Agricultural Economist

Kansas State University

Robert Wisner

University Professor Emeritus

Iowa State University

CORN MARKET PROSPECTS A. Risk of a Short 2011 U.S. Corn Crop

a) % 2011 U.S. corn crop ≤ 13.0 bln bu (13.47 bb July USDA)

Sharp rationing of livestock, export &/or ethanol corn use

Record low U.S. corn % stocks-to-use (≤ 5%)

Record high U.S. Corn $s in MY 2011/12 (≥ $6.50 /bu)

B. 2011 U.S. Corn Production a) 2011 Planted & Harvested Acres?

• July 2011 NASS Northern Plains Survey of MN, ND, SD, Montana

• Late planting in Eastern Corn Belt (Ohio, Indiana, Michigan, etc.)

• River flood damage on the Missouri, Ohio, Mississippi & tributaries

• Likely a reduction in 2011 U.S. corn acres due to a combination of these factors (from 92.3 to 91.8 mln acres planted, or even lower?)

CORN PRODUCTION IN 2011

B. 2011 U.S. Corn Production (more)

b) 2011 Corn Yield Prospects?• Slow development due to late spring planting (OH, MN, IN, KY,

NE, KS, MI) → Fall 2011 corn maturity and/or freeze risk?

• High pressure weather system over central & eastern U.S. Corn Belt (July-early August) → Damage during key development stages?

c) 2011 Corn Production Prospects?• Increasing likelihood of reduced projections of 2011 U.S. corn

production (i.e., below 13.470 bln bu in July USDA reports) → Would reductions be “marginal” (i.e., 13.25 bb) or “major” (≤ 13.0 0bb)?

• Probability of U.S. Corn Production Outcomes for MY 2011/12

20% probability 148.8 bu/ac 12.565 bb U.S. Crop

50% probability 153.0 bu/ac 12.920 bb U.S. Crop

30% probability 159.0 bu/ac 13.425 bb U.S. Crop

CORN USE IN MY 2011/12

C. Corn Use: Is Price Rationing Occurring?

a) March-May 2011 Corn Use 16% vs 2010 o Feed use 44%, exports 8%, FSI 6%

b) Exports “slow”: Total U.S. corn shipments 4% vs 2010

c) Livestock Feed Use: With livestock $s, are livestock feeders better positioned to manage corn $s?oYes, BUT low feed use in March-May 2011 raises questions

about potential rationing impact

oU.S. GCAUs projected @ 94.3 million for MY 2011/12

Vs 92.9 mln in MY 2010/11 & 91.6 mln in MY 2009/10

d) Ethanol / FSI Use: Steady, buy/sell margin dependento “Walk’n the line” of Blend Wall/RFS demand inelasticity

CORN ENDING STOCKS: MY 2011/12

D. Ending Stocks & %S/U: Will S/U be ≤ 5%?

a) Projected U.S. Corn Stocks-to-Use at/near Record Lows o 6.4% (23.5 days supply) for MY 2011/12 → 2nd lowest since

1970

o 6.6% (24.1 days supply) for MY 2010/11 → 3rd lowest since 1970

o 5.0% (18.3 days supply) for MY 1995/96 → Record low since 1970

b) Probability of U.S. Corn Supply-Demand Balance Outcomes for MY 2011/12

o20% 12.565 bb Crop 590 mb end stocks 4.6% S/U****

o50% 12.920 bb Crop 660 mb end stocks 5.0% S/U**

o30% 13.425 bb Crop 825 mb end stocks 6.1% S/U

c) Low MY 2011/12 end stocks carrying into MY 2012/13

o Tight U.S. corn stocks persisting 1-2 years until Supply > Use

WORLD COARSE GRAINS S/D

D. World Market: “Production issues?”

a) Sensitivity to Foreign Coarse Grain Supply-Demand oCrop Issues in Canada, Ukraine, Brazil

o Increased China & Mexico import needs

b) World Coarse Grain Ending Stocks (July WASDE) 100%+ due to projected U.S. Corn Production / StocksoWorld End Stocks = 148.23 mmt (12.9% S/U) → up 3.97

mmt

oU.S. End Stocks = 24.80 mmt → up 4.08 mmt

oNon-US End Stks = 124.44 mmt → dn 0.09 mmt

World Coarse Grain Ending Stocks for MY 2011/12 are vulnerable to potential reductions in 2011 U.S. corn & coarse grain production prospects!!! (4 mmt = 157 mb)

CORN PRICE PROSPECTS

E. U.S. Corn Prices: Driven by S/D (+ other?)

a) Probability of U.S. Corn S/U & Price Scenarios for MY 2011/12 o20% 590 mb end stocks 4.6% S/U $7.00-

$8.00 /bu

o50% 660 mb end stocks 5.0% S/U $6.10-$7.10 /bu

o30% 825 mb end stocks 6.1% S/U $5.50-$6.50 /bu

Increasingly inelastic U.S. corn price responses as total corn supplies & Supply/Demand balances tighten

b) Low Stocks → Inelastic Demand → Volatile/High $s o IF tight U.S. corn stocks persists 1-2 years until Supply > Use,

THEN expect to have volatile corn markets through MY 2012/13 +

c) Financial & Currency Market Effects on Corn $s???oS/D factors (+USD$) determinate; specs in/out affects

$volatility

U.S. CORN SUPPLY-DEMAND**

USDA FEED OUTLOOK REPORT: 7/14/2011 (ETHANOL-DDGS SEPARATE)

MY 2009/10 MY 2010/11 MY 2011/12 Planted Ac. (mln.) 86.4 88.2 92.3 Harvested Ac (mln.) 79.5 81.4 84.9 Yield (bu./ac.) Record High 164.7 152.8 158.7 Beginning Stocks 1,623 1,708 880 Production Old Record 13,092 12,447 Record 13,470

Total Supplies Record 14,774 14,180 14,370 Ethanol ** **3.290 **3.620 **3.690 Other Food, Seed, Ind. 1,371 1,380 1,400 Exports 1,987 1,875 1,900 DDGS (ethanol) ** **1.280 **1.430 **1.460 Feed & Residual 5,140 5,000 5,050

Total Use 13,066 13,305 13,500 End Stocks (%S/U) (13.1%) 1,708 (6.6%) 880 (6.4%) 870 U.S. Avg. Farm $ $3.55 $5.25 $5.50-$6.50

U.S. CORN USAGE & END STOCKSSEPARATION OF CORN-ETHANOL & CORN-DDGS (USDA FEED OUTLOOK REPORT, 7/14/2011)

MY 2011/12 U.S. CORN S/D SCENARIOSLOW, MEDIUM & HIGH U.S. CORN YIELD SCENARIOS (WISNER-O’BRIEN)

Low Yield Medium Yield High Yield

Planted Ac. (mln.) 91.8 91.8 91.8 Harvested Ac (mln.) 84.4 84.4 84.4 Yield (bu./ac.) (20%) 148.8 (50%) 153.0 (30%) 159.0 Beginning Stocks 880 880 880 Production 12,565 12,920 13,425

Total Supplies 13,465 13,820 14,325

Ethanol 4,825 4,950 5,050 Other Food, Seed, Ind. 1,350 1,370 1,400 Exports 1,850 1,900 1,950 Feed & Residual 4,850 4,940 5,100

Total Use 12,875 13,160 13,500

End Stocks (%S/U) (4.6%) 590 (5.0%) 660 (6.1%) 825

U.S. Avg. Farm $ $7.00-$8.00 $6.10-$7.10 $5.50-$6.50

ECONOMIC FACTORS

AFFECTING

U.S. GRAIN MARKETS

U.S. DOLLAR INDEX MONTHLY PRICE CHART (DX – NYBOT): MAY 2002– JUNE 2011

Index = 85

Index = 75

Range of $74-77 in July 2011 (74.41 on 7/22/2011)

U.S. DOLLAR INDEXWEEKLY PRICE CHART ($USD): JULY 2008 – JULY 22, 2011

LIGHT CRUDE OIL PRICES WEEKLY PRICE CHART ($WTIC): JULY 2008 – JULY 22, 2011

CONTINUOUS CRB INDEXMONTHLY INDEX CHART (CI–NYBOT): MAY 2002 – JUNE 2011

Index = 650

Index = 550

Index = 450

623-656 range in July 2011 (651.73 on 7/22/2011)

BALTIC DRY INDEXWEEKLY PRICE CHART ($BDI): JULY 2008 – JULY 22, 2011

Indicator of the competitive market cost of

buying space onboard ocean shipping vessels

DOW JONES INDUSTRIAL AVERAGE WEEKLY PRICE CHART ($INDU): JULY 2008 –

JULY 22, 2011

FEEDGRAIN MARKETS:CORN & GRAIN SORGHUM

U.S. CORN % END STOCKS-USE MY 1985/86 THRU MY 2011/12 JULY 12, 2011 USDA WASDE

REPORT

U.S. CORN %STOCKS/USE VS PRICE$ MY 1973/74 THRU MY 2011/12 JULY 12, 2011 USDA WASDE REPORT

CBOT DEC 2011 CORN FUTURESJULY 21, 2010 THROUGH JULY 22, 2011

$7.14

$5.96¾

Close of $6.85 ½

on July 22, 2011

High close of $7.14 on July 9th

2011

Up since $5.96¾ on July 1st

2011

CBOT CORN FUTURESMONTHLY: MAY 2002 THRU JUNE 2011

$7.50

$6.25

$5.75-$7.00 for July

($6.90 on 7/22/2011)

CBOT CORN FUTURESMONTHLY CARRYING CHARGES & NEW CROP TRENDS: JULY 22, 2011

63% of full carry

50% fc 44% fc

CFTC data through July 18, 2011; Used by permission of Dale Durchholz, Agrivisor

U.S. CORN SUPPLY-DEMANDUSDA WASDE REPORT: JULY 12, 2011

MY 2009/10 MY 2010/11 MY 2011/12 Planted Ac. (mln.) 86.4 88.2 92.3 Harvested Ac (mln.) 79.5 81.4 84.9 Yield (bu./ac.) Record High 164.7 152.8 158.7 Beginning Stocks 1,623 1,708 880 Production Old Record 13,092 12,447 Record 13,470

Total Supplies Record 14,774 14,180 14,370

Ethanol 4,568 5,050 5,150 Other Food, Seed, Ind. 1,371 1,380 1,400 Exports 1,987 1,875 1,900 Feed & Residual 5,140 5,000 5,050

Total Use 13,066 13,305 13,500

End Stocks (%S/U) (13.1%) 1,708 (6.6%) 880 (6.4%) 870

U.S. Avg. Farm $ $3.55 $5.25 $5.50-$6.50

U.S. CORN USE & END STOCKSMY 2004/05 THRU MY 2011/12 JULY 12, 2011 USDA WASDE REPORT

U.S. CORN SUPPLY-DEMAND**

USDA FEED OUTLOOK REPORT: 7/14/2011 (ETHANOL-DDGS SEPARATE)

MY 2009/10 MY 2009/10 MY 2011/12 Planted Ac. (mln.) 86.4 88.2 92.3 Harvested Ac (mln.) 79.5 81.4 84.9 Yield (bu./ac.) Record High 164.7 152.8 158.7 Beginning Stocks 1,623 1,708 880 Production Old Record 13,092 12,447 Record 13,470

Total Supplies Record 14,774 14,180 14,370 Ethanol ** **3.290 **3.620 **3.690 Other Food, Seed, Ind. 1,371 1,380 1,400 Exports 1,987 1,875 1,900 DDGS (ethanol) ** **1.280 **1.430 **1.460 Feed & Residual 5,140 5,000 5,050

Total Use 13,066 13,305 13,500 End Stocks (%S/U) (13.1%) 1,708 (6.6%) 880 (6.4%) 870 U.S. Avg. Farm $ $3.55 $5.25 $5.50-$6.50

U.S. CORN USAGE & END STOCKSSEPARATION OF CORN-ETHANOL & CORN-DDGS (USDA FEED OUTLOOK REPORT, 7/14/2011)

U.S. CORN USAGE & END STOCKSSEPARATION OF CORN-ETHANOL & CORN-DDGS (USDA FEED OUTLOOK REPORT, 7/14/2011)

MY 2011/12 U.S. CORN S-D SCENARIOSLOW, MEDIUM & HIGH U.S. CORN YIELD SCENARIOS (WISNER-O’BRIEN)

Low Yield Medium Yield High Yield

Planted Ac. (mln.) 91.8 91.8 91.8 Harvested Ac (mln.) 84.4 84.4 84.4 Yield (bu./ac.) (15%) 148.8 (50%) 153.0 (35%) 159.0 Beginning Stocks 880 880 880 Production 12,565 12,920 13,425

Total Supplies 13,465 13,820 14,325

Ethanol 4,825 4,950 5,050 Other Food, Seed, Ind. 1,350 1,370 1,400 Exports 1,850 1,900 1,950 Feed & Residual 4,850 4,940 5,100

Total Use 12,875 13,160 13,500

End Stocks (%S/U) (4.6%) 590 (5.0%) 660 (6.1%) 825

U.S. Avg. Farm $ $7.00-$8.00 $6.10-$7.10 $5.50-$6.50

U.S. GRAIN SORGHUM SUPPLY-DEMANDUSDA WASDE REPORT: JULY 12, 2011

MY 2009/10 MY 2010/11 MY 2011/12 Planted Acres (mln.) 6.6 5.4 5.3 Harvested Ac. (mln.) 5.5 4.8 4.6 Yield (bu./ac.) 69.4 71.8 65.4

Beginning Stocks 55 41 27 Production 383 345 300

Total Supplies 438 387 327 Food, Seed, Industrial 90 95 90 Exports 166 140 130 Feed & Residual 140 125 80

Total Use 396 360 300 End Stocks (%S/U) (10.4%) 41 (7.5%) 27 (9.0%) 27

U.S. Avg. Farm $ $3.22 $5.10-$5.30 $5.10-$6.10

U.S. MILO USE & END STOCKSMY 2004/05 THRU MY 2011/12 JULY 12, 2011 USDA WASDE REPORT

ETHANOL PRICE, COST & PROFITSISU ETHANOL PLANT MODEL (JANUARY 2005 – JUNE 2011)

Net$0.06

Price $2.60

Cost$2.54

($0.50)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50Ja

n-05

Apr-

05Ju

l-05

Oct

-05

Jan-

06Ap

r-06

Jul-0

6O

ct-0

6Ja

n-07

Apr-

07Ju

l-07

Oct

-07

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-

09Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-

11Ju

l-11

$ P

er G

all

on

of

Eth

an

ol

Profit-Loss Ethanol Price Ethanol Breakeven

CBOT SEPT 2011 ETHANOL FUTURESJULY 22, 2010 THROUGH JULY 22, 2011

High close of $2.794 on July

22, 2011

Up since $2.357 /gal on June

30, 2011

Close of $2.795

on July 22, 2011

$2.727

$2.36

CBOT DEC 2011 ETHANOL FUTURESJULY 22, 2010 THROUGH JULY 22, 2011

High close of $2.554 on July

19, 2011

Up since $2.175 /gal. on June

30, 2011

Close of $2.543 on July 22,

2011

$2.18

$2.55

U.S. CORN ETHANOL - FSI USEJULY 12, 2011 USDA WASDE REPORT

U.S. ETHANOL INDUSTRY CAPACITYSOURCE: RENEWABLE FUELS ASSOCIATION

If E-15 is fully implemented by end of year 2015, then would need 20-21 bgy

U.S. Ethanol production capacity, using ≈ 7.5 bln bu of U.S. corn / year

WORLD COARSE GRAIN S-DMY 2007/08 THRU MY 2011/12 JULY 12, 2011 WASDE REPORT

COARSE GRAIN EXPORTER SALESMY 2009/10 THRU MY 2011/12 JULY 12, 2011 USDA WASDE REPORT

COARSE GRAIN IMPORTERSMY 2009/10 THRU MY 2011/12 JULY 12, 2011 USDA WASDE REPORT

WORLD CORN %S/U: VIEW #1WORLD, U.S. & WORLD LESS U.S. MY 1970/71-MY 2011/12

A. U.S. S/U in mid-1980s was a major contributor to World S/UB. U.S. S/U since MY 2000/01 partly affected World S/U

A

B

WORLD CORN %S/U: VIEW #2WORLD, CHINA & WORLD LESS CHINA MY 1970/71-2011/12

AB

WORLD CORN %S/U: VIEW #3U.S., CHINA & WORLD LESS BOTH MY 1970/71-2011/12

CBOT DEC 1996 CORN FUTURESHOW CORN MARKET RESPONDED TO TIGHT S/U IN SUMMER

1996

Strong move higher through early July

Down/up thru July-Aug; Decline into fall

Q. How likely is this cornprice pattern in 2011?

QUESTIONS?

Daniel O’Brien

Extension Agricultural Economist

Kansas State University

Robert Wisner

University Professor Emeritus

Iowa State University

Grain Market Analysis information is available onwww.agmanager.info