Corn yields this harvest could be as low as 115 bushels per acre or as high as 144 bushels per acre according to a cross-section reading of analysts’ reports following USDA’s World Agricultural Supply and Demand Estimate report this week. USDA is forecasting a corn yield of 146.0, harvested area of 88.9 million acres with a corn harvest of 12.970 billion bushels.
Dan Basse, President of AgResource Company, and others participated on a CME simulcast this week and the participants generally concluded that if corn and soybean yield damage is as extensive as a number of analysts believe, the price escalation will continue for these crops. “The loss of crop is the largest I’ve seen in such a short period of time,” says Basse. A 10 percent overall yield loss would put the U.S. average yield at 141 bushels per acre, which equates to overall production of less than 12 billion bushels. In two previous droughts, yield losses were greater than 10 percent. Corn yield dropped 30 percent below trend yield in 1988 and 20 percent below trend in 1983. A 20 percent yield decline would put the U.S. average yield between 130 and 132 bushels per acre, Basse explained.
“That is a catastrophe,” said Basse. On top of the yield loss, Basse expects 2 million to 3 million acres of corn to be abandoned. “We are finding fields in Indiana and Illinois that will yield nothing,” he said.
The potential for soybean yield has also dropped dramatically, but plentiful and frequent rains still could still help the soybean crop. U.S. and world soybean stocks, however, are very tight due in part to last year’s drought in South America, and any yield loss would be problematic. “Back-to-back drought in soybean production regions is unprecedented,” Basse noted. “Corn and soybean prices will stay at extremely high levels for the next several months.”
Basse says that $8-9 per bushel corn and $17-19 per bushel beans are likely unless the weather pattern changes in time to help Iowa’s crops. He has not ruled out corn prices above $10 per bushel and bean prices higher than $20 per bushel if conditions deteriorate much further.
A worse-case corn balance sheet scenario estimated by Dr. Darnel Good and Scott Irwin, agricultural economists with the University of Illinois, has a corn yield of 125 bushels per acre, 87.4 million acres harvested with a crop harvested of 10.925 billion bushels. Ending corn stock for 2012/13 would be 570 million bushels or 5.0 percent of total usage. This scenario would require an average farm corn price of $8.69 per bushel to ration the limited production.
Good and Irwin in developing their scenario assumed ethanol use of corn as a residual because its use is the most price elastic component of corn usage. They explained their thinking as follows: “It is widely argued that ethanol use is perfectly price inelastic up the quantity mandated under the Renewable Fuels Standard (RFS). But this ignores the feature of the RFS that allows fuel blenders to accumulate carryover stocks of RINS credits that can be used to meet the mandate in lieu of blending actual gallons of ethanol. Previous estimates of the stock of RINS found that blenders probably hold at least 2 billion gallons of RINS that could be used to partially meet the RFS mandate during the 2012/13 marketing year. Technically, we assume that ethanol use is the most price elastic category up to the point where the available stock of RINS is used up. Without policy changes ethanol use after the stock of RINS is used up would become perfectly price inelastic. One additional topic deserves mention. Fuel blenders also have the option to defer up to 20 percent of the RFS mandate in a given year but this ‘borrowing’ has to be made up in the following year. This could make the breakpoint where ethanol use becomes perfectly inelastic even lower. However, we do not believe it is reasonable to project substantial usage of the borrowing provision because the additional quantities would push ethanol blending above the 10 percent blend wall in the following year.”
Commenting on the question of “is the current level of prices high enough to ration usage in light of substantially diminished expectations about supply,” the analysts noted that in central Illinois the current forward bid price for harvest delivery of corn is about $7.20 per bushel. This price is consistent with the scenarios where yield is between 135 and 140 bushels. If yield turns out to be above 140 then current prices would appear to be sufficient, and perhaps more than sufficient, to ration usage, the analysts added. An average yield of 135 bushels or less would require substantial further rationing, resulting in record high average prices. Under such a scenario, history suggests that prices may go well above the expected average price in order to initiate the additional rationing process. Prices have probably not yet gone high enough to accomplish the necessary rationing if the average yield is below 135 bushels. Good and Irwin added that “it is important to emphasize that our analysis should be viewed for what it is—a simple, first take on what might happen under alternative corn yield scenarios. How actual market dynamics will be worked out is fraught with complexities. In particular, we are in uncharted territory regarding the interaction of the corn, ethanol, and gasoline markets in a major drought. This adds even more uncertainty to what is already an extremely volatile market situation.” Their farmdocdaily report of July 13 can be viewed here.
In a related report, Secretary of Agriculture Tom Vilsack said during a telephone news conference this week when asked a question about corn-based ethanol he said “at this point, we have no plans to adjust the Renewable Fuels Standard.”
