With corn production down and corn consumption up, the market is poised to see record-high prices per bushel in the 2010-11 marketing year, according to a marketing and outlook brief prepared by University of Illinois agricultural economists Darrel Good and Scott Irwin.
"We looked at the current situation in which we're expecting very tight year-ending stocks and developed three supply, consumption, and price scenarios for the 2011-12 marketing year," Good said. "The yield alternatives include a trend yield, an average yield resulting from good weather, and an average yield resulting from poor weather. We followed those scenarios through a balance sheet and into a price projection under each of those three scenarios, just to underscore how important crop size is to next year's average price."
In one scenario, Good and Irwin calculated a trend yield based on actual U.S. yields since 1960 at 158 bushels for 2011. This was applied to an expected 92 million acres planted.
"This is a speculation based on where the market is centering on its expectation about acreage response this year," Good said.
In the second scenario, they looked at the historic yields since 1960 and converting those yields into 2011 equivalents, that is, they added the trend back into the actual yields and then calculated the average yield for the 10 lowest-yielding years since 1960.
"That calculates to be 147 bushels per acre, in terms of 2011 technology," Good said.
"Then we looked at the 10 highest-yielding years and calculated the average, which was 169 bushels in today's technology. With those calculations, we asked, what if we have those three alternative-yield scenarios? What does that imply for the balance sheet and the price of corn next year?"
The summary concludes in the trend yield scenario that the market would not be able to begin to rebuild inventories next year, the year-ending stocks would remain at 675 million bushels and corn prices would average relatively high, near $5.75 per bushel. This is compared with the expectation of $5.40 for the current year.
"Under the good-weather scenario, we would see a big crop of over 14 billion bushels." Good explained that this scenario would suggest there would be room to expand consumption and build the year-ending stocks to 8 or 9 percent of consumption.
"We believe that would result in a season's average price slightly under $5 per bushel, with our projection at $4.75 as next year's average price," he said.
Under the poor-weather scenario, Irwin and Good see two outcomes.
"First, consumption would have to be restricted considerably,primarily in the livestock sector," Good said. "The year-ending stocks would be reduced to an absolute minimum level -- we think about 5 percent of annual use, or about 625 million bushels."
Good said that with high livestock prices average corn prices would be very high during the 2011-12 marketing year--about $7 for the year, recognizing that at points during the year prices could be substantially higher.
He noted that trend yield can be calculated differently, using different time periods.
"Most people use a shorter time period than we do and get a trend yield that's maybe 3 bushels higher than the 158 that we use," Good said.
"Still, the three scenarios would unfold very similarly to what we've outlined here.
"The most troublesome scenario for 2011 would be a short crop that resulted in extremely high prices," Good added.
"That is the scenario that might require some policy adjustments that policy makers should be thinking about now."
Source: Alternative 2011 Corn Production Consumption and Price Scenarios by Darrel Good and Scott Irwin.
Artwork: Corn Harvest by Diego Rivera