History of the corn collapse

Jan 4, 2014
by DTN

Although 2012 and 2013 started with a similar sense of foreboding fundamentals, they ended with two very different corn stockpiles.

There’s no need to remind farmers of the record corn prices following the 2012 drought, and some farmers would prefer it if we didn’t recount corn’s 27 percent price decline over the course of 2013.

Yet, we must. No other event in 2013 permeated the fabric of American agriculture like the dramatic decline of corn prices.

“The biggest story of 2013 is the end of the demand market for corn,” said DTN Senior Analyst Darin Newsom. “From record crops despite unfavorable weather to attacks on demand on all three fronts, the end of King Corn’s reign will have long-lasting ripple effects across agriculture.”

Last winter, most expected farmers would plant 100 million acres of corn.

“There was a sense the U.S. was going to produce a lot of corn. And demand, after three years of declines, would have to come back stronger than ever. The stage was set for everyone to feel very uneasy heading into planting,” Newsom said.

Then it rained heavily enough to erase lingering drought conditions and long enough to delay farmers’ planting in northern Iowa and southern Minnesota. Some replanted fields were switched to soybeans, but the question remained: How many acres actually went unplanted?

The uncertainty supported the market as the crop sprouted, grew tall and headed into the critical, yet delayed, pollination phase.

Old-crop tightness became impossible to ignore. The inverted futures spread—meaning the nearby, old-crop contracts were priced higher than fartherout, new-crop contracts— widened to $1.32 in June as ethanol plants and cattle feeders begged for corn. Cash grain traders pushed the national average basis to record highs, hitting a peak of $1.38 over futures in the third week of July.

At about the same time, support in the new-crop price began to break. USDA reconfirmed its bearish acreage estimates, saying corn grew on 97.4 million acres. The new-crop spreads moved into a 10- to 20-cent carry, and commercial traders expected plenty of corn.

By mid-July, noncommercial traders established a net-short futures position for the first time since Dec. 19, 2005, the pivotal year when the Renewable Fuel Standard created 5 billion bushels of new corn demand.

“Follow the money,” Newsom said. “It’s very clear investors lost interest in the corn market and didn’t see anything in the supply and demand picture for them to be long the market.”

Then a late hot and dry spell caused USDA to trim its yield expectations to a low of 154.4 bushels per acre in August. Many expected another cut in September, but USDA reversed course and boosted its national average yield expectation to 155.3 bpa.

“At that time everyone said, ‘Well, maybe we do have a lot of corn out there,’” Newsom said. After USDA returned from October’s government shutdown, it projected a national average corn yield at 160.4 bpa. It scaled back its harvested acreage estimate by 2 percent, which incorporated the Farm Services Agency 3.6 million prevented-planting acreage figure, and projected record U.S. production of 14 billion bushels.

With a massive crop on hand, the damage three short crops did to demand reared its ugly head. The cattle herd had shrunk to the smallest since World War II. Exports collapsed to one third of their historical average in the 2012- 2013 marketing year and still haven’t recovered to 2009 levels. Then EPA proposed a cut in its mandate for corn-based ethanol, despite the fact ethanol had been banging its head against the blend wall for several years. The steadyeddy leg of corn demand wobbled.

The demand market, characterized by increasing demand on stable to growing supplies, vanished.

With total demand below 2009 levels, the market shifted from hustling to satisfy all the buyers to offering bargain barrel prices to tempt buyers back.

“With rapid supply recovery swamping ideas of demand recovery, it’ll take time before we’re in a demand market again,” Newsom said.

Low prices now begin the arduous task of rebuilding the corn usage base. Some ag economists, like Purdue University’s Chris Hurt, argue that a moderation of corn prices makes for a healthier agriculture sector in the long run. After years of thinning their herds and flocks, livestock producers have the chance to expand again.

“It means better balance between the crop sector and the animal sector,” he said. “And there is some value in that better balance.”

Katie Micik, DTN