Source: John Michael Riley, Asst. Extension Professor, Department of Agricultural Economics, Mississippi State University
The World Agricultural Outlook Board of USDA released their monthly World Agricultural Supply and Demand Estimates report (WASDE) this past Friday morning. For those who have not seen the report for corn, here is a quick recap. The report, for the second month in a row, revealed a smaller estimated corn crop. Yield is currently projected 123.4 bu/ac compared to 146.0 projected last month and 126.2 expected by pre-report analyst. Collectively, the projected national yield has fallen 42.6 bu/ac from the trend yield of 166.0 reported in June. After factoring in a projected decrease in the number of acres that will be harvested (from 88.9 million to 87.4) this would put production at 10.779 billion bushels. The production estimate was 192 million lower than the pre-report expectations of 10.971 billion bushels (the pre-report yield and production expectations resulted in an implied harvested acreage number of 86.9 million). If realized corn acreage abandonment would surpass 9 million acres, the largest amount going back as far as 1950, and this is a conservative estimate, as the number of corn acres harvested for silage has not been reported.
The lower supply will cause some rationing by end users. This is reflected by USDA in that projected corn used for feed was lowered to 4.075 billion bushels, down 725 million, projected corn used for ethanol was lowered 400 million bushels to 4.5 billion, and corn exports were lowered to a projected 1.3 billion bushels, down 300 million. Collectively USDA projects corn ending stocks at 650 million bushels, a 45% decline from last month's expectations but in-line with the average pre-report estimate of 651. The smaller yield and production number had traders nervous in the early trading and corn surged to $8.48 3/4 per bushel. After the knee-jerk reaction, prices cooled as all USDA values were in the ballpark of what had already been priced into the market, especially the ending stock number.
So, over the course of two months, 4.011 billion bushels of corn have evaporated with the drought. What appeared to be a bin-busting crop early in the season due to ahead of schedule plantings and favorable weather has potentially become roughly equal to the size of the crop in the mid 2000’s. However, the use of corn has changed over this same time period. Corn used for feed purposes has declined 30%, from about 6 billion bushels to the latest projection of 4.075, while corn used for ethanol has increased from just over 1.5 billion bushels to 4.5 or roughly 2.5 times more. Granted, the co-products that are made available through the ethanol production process have offset some of this loss. The pending fact that fewer cattle will be available to feed will also alleviate some of the feed corn demand pressure. Still, losing four billion bushels has already stung the market and the industry and will likely continue to wreak havoc moving forward.
Despite the further reduction in the nation’s corn crop, futures prices for corn have taken the news in stride, for the most part. As noted above, the initial reaction to the report created a temporary rise in prices to new record levels but the impact was short lived. December contract prices have been fairly steady since mid-July, trading in about a $0.50/bu range between $7.70 and $8.20. Cash prices, on the other hand, have not shown the same resiliency. Corn basis in Omaha was $0.40 to $0.60/bu above normal levels through June and early July as futures prices slowly adjusted to the complications of the drought. Those levels returned to a more normal state during late-July but following the USDA reports, cash prices at Omaha were at a 15 cent premium to the nearby September contract, which was 34 cents/bu above normal basis levels. The story has been similar in the Southern Plains where basis has been running about 40 to 60 cents above normal in Dodge City and about 20 to 40 cents above normal in the Texas Panhandle.
Cash fed cattle moved higher again this week. Trade movement was low enough that no trends were called this week for individual states, but the five-area, regional, price was higher by$1.58/cwt at $119.16/cwt. In Oklahoma, feeders were steady to $2/cwt higher, while calves were steady to $4/cwt higher. Boxed beef prices moved higher this week after last week’s leveling off which curtailed seven weeks of negative movement. Choice wholesale beef finished with a weekly average of $181.46/cwt, up $3.57.