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JakilaTheHun (99.93)

"Corn Prices May Enter Decade Long Slump"

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January 13, 2009 – Comments (9) | RELATED TICKERS: RJA , JJA , DBA

The outlook for corn is fairly dismal according to the article below.  I wouldn't be surprised actually because I'd be willing to wager that ethanol has created a vast amount of excess supply in the market. Still, I wish I knew more about agricultural commodities fundamentals --- if corn is above production cost for a large chunk of farmers, it might be undervalued.

As far as ag goes, I've mostly limited myself to Syngenta (SYT), the potash producers (MOS, AGU, IPI), grains (JJG), and general agriculture ETFs/ETNs (JJA, RJA).

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"The Outlook for Corn"

By Julian Murdoch

Source: Hardassetsinvestor.com

 

A bleak headline from Bloomberg greeted farmers and commodity investors alike last Thursday morning:

"Corn Prices May Enter Decade-Long Slump, Agency Says"

It's not often the government declares your business in the toilet. The forecast comes from data prepared by the Congressional Budget Office (CBO) for its annual budget report - this year's pithily titled "The Budget and Economic Outlook: Fiscal Years 2009 to 2019." You won't find a single mention of corn, agriculture or even the farm bill in the report, but that doesn't mean the numbers aren't underneath all the malarkey.

If you look through the supplementary documents, you'll see where Bloomberg got its depressing headline. Because corn subsidies are a not-inconsiderable expense for the U.S. taxpayer, the CBO essentially has to make a prediction. And the agency is forecasting corn's average price to hang out between $3.65 and $3.94 a bushel between 2010 and 2019. 2009 is forecast to average only $4.02. In other words, the government thinks corn is staying flat or trending down over the next decade. If you're a farmer (or investor) counting on $5+ corn, that's a big ouch.

Granted, budget numbers can vary between stringently realistic to worst-case-scenario-type planning, but considering the ride corn has been on in the past year, the forecasted prices seem pretty low.

Corn averaged around $5.16 a bushel in the past year, closing at a high of $7.27 on June 27. If the government's forecast is accurate, the effects will be considerable.

$4 Corn

While still not exactly cheap, corn under $4 does have its positives.

First off, ethanol plants will see their costs come down, assuming there are any ethanol companies around to take advantage of the prices - the largest, VeraSun (VSUNQ.PK), is currently in Chapter 11. With gasoline prices back near 2005 levels, demand for ethanol has (unsurprisingly) fallen off. Even though corn prices have dropped to almost half of their record high, ethanol manufacturers are closing plants and cutting production, as the price for their product is dropping faster. The combination of low demand and the high corn contract prices they had to accept in the summer killed their margins. If corn stays cheap enough long enough, however, it could turn the ethanol market around.

Also on the plus side: Lower corn prices translates to lower feed prices, which eases the cost pressure on livestock feed lots. Of course, in slim economic times, demand for expensive meat goes down, but the ease in feed costs may give meat producers a little more flexibility in riding out the slim times without having to decimate their herds to save money, which is where things were headed with corn at $7.

On the negative side, with prices forecasted this low, it may be too expensive to actually plant and harvest a crop. From Reuters on Friday:

"We can't afford to raise the crop," said Indiana [Farm Bureau] president Don Villwock. "Prices are below the cost of production for corn and soybeans."

Input costs are up all over the board - from land costs to seed to fertilizer, farmers are having to make a lot of decisions right now on where to spend their money on their next crop - and just what that crop will be. Again, from Reuters:

Farmers are waiting far longer than usual to decide which crops to plant, said South Carolina president David Winkles. "There is so much uncertainty of what you can pencil in for a profit," Winkles said.

Some of that uncertainty is due to uncertainty in input costs. Seed costs are high -- Monsanto (MO) is raking it in -- as are fertilizer costs. In fact, fertilizer costs may be heading higher just as crop prices are coming down, due to, of all things, the conflict occurring between Russia and Ukraine about natural gas. The gas that flows through Ukraine flows to 18 countries. With cold weather affecting the area, activities that require high energy input, like fertilizer production, are being shut down.

Nitrogen production in particular, in countries like Poland and others, has been reduced, and in some cases shut down completely. There is some concern about a coming nitrogen shortage and corresponding price increases. While recent news suggests the disagreement will settle down, the local uncertainty is far from settled.

Not exactly a fun time to be a farmer.

Where Are We Now?

On Monday, the USDA will be releasing its final production numbers for 2008 for agricultural products like corn and soybeans - and the numbers are likely to be low. 2008 was plagued with a slow start due to planting delays and flooding. Crops seemed to recover during the summer only to be hit with harvesting delays that may have meant a lot of corn left in the field unharvested.

The lower harvest numbers could mean good news for prices going forward, something that farmers are going to need as they deal with the reality of planting for this year, and the forecasted tough times ahead. But until we get a better sense of the planting numbers (still months away), we won't know what 2009 will hold.

And until we have a feeling for 2009, looking out to 2019 will be quite a stretch indeed.

 

9 Comments – Post Your Own

#1) On January 13, 2009 at 2:35 AM, angusthermopylae (38.86) wrote:

I'm not a dyed-in-the-wool corn grower, but I do know a little (I live on a small farm, with lots of animals to feed)

Corn is not just corn.  Corn used in ethanol production is different that that used in livestock feed (or even people feed).  Livestock feed corn has a higher protein content...good for animals, bad for ethanol.  Ethanol corn is the reverse.

Like you said, there are several conflicting and congruent factors for the change in price.  When fuel prices were high, everyone was talking about ethanol...so a lot of big farms were planting ethanol crops.  This, as well as bad weather, lead to higher feed costs. (less feed corn planted)

A lot of beef growers (smaller farms, and probably quite a few bigger factory farms) couldn't live with the higher corn costs, so they downsized or sold off/killed off their livestock.  (Here in southern Ohio, the story was repeated over and over--people were getting rid of their herds because they couldn't afford to feed them.)

Now, as you've probably noticed, meat prices are ridiculously high--$2.75+ / pound for the cheapest meats?!?  Suddenly, it's hard to find a good steak, or a pound of hamburger that doesn't look like it came from an anemic goth cow.

Add to that the "unexpected" (ha!) economic slide, and now all those people out there aren't going to be able to afford any kind of steak.

Plus, with fuel prices sliding to less than half of what they were 6 months ago, and ethanol production isn't that profitable anymore...

...now you have ethanol corn that no one wants, feed corn with fewer cattle to eat it, and a general climate where even if someone wanted to eat meat, they can't afford (as much of) it as they used to....

Again, in my opinion, the 2009 corn/meat saga will depend on a lot of different things.  There will probably be even less incentive for beef farmers (banks won't lend, and consumers can't buy), so that means that meat prices will move quickly (up or down, I don't know...supply and demand will be out of whack for most of the year), but corn production will probably be out of synch, too...

Longer term, I think corn and beef prices will yo-yo around for about 2-3 years, not 10.  Eventually, the economy will turn around (I'm a Bear with a long view...); then the demand for meat will go back up to a more stable point, and the corn prices will follow (or come down after some intermediate highs)  

Either way, it's a bad time to be a farmer.

On the other hand, if Yellowstone blows, every corn, cabbage, and potato farmer not under a foot of volcanic ash will be rich....because they'll have the only food around.

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#2) On January 13, 2009 at 8:51 AM, djemonk (< 20) wrote:

On the other hand, if Yellowstone blows, every corn, cabbage, and potato farmer not under a foot of volcanic ash will be rich....because they'll have the only food around.

Betting on something that happens every thousand millenia or so may not be your wisest move.  Yes, it will eventually erupt, but geologists expect to have centuries of warning before it does.

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#3) On January 13, 2009 at 9:55 AM, angusthermopylae (38.86) wrote:

Sorry...that was meant two ways--both slightly sarcastic and self-deprecating about predicting anything; predicting long term is prone to error, and prognosticators shouldn't take themselves too seriously.

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#4) On January 13, 2009 at 10:30 AM, gbryce (< 20) wrote:

I have one question. When you write that corn will average $4.02 is that the average board price spread over every trading day of ,09 ; or is that the average price that growers will sell at.

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#5) On January 13, 2009 at 10:57 AM, JakilaTheHun (99.93) wrote:

gbryce,

I didn't write it, so I have no clue.  It's a reposted article.  

If you want to ask the author the question, you could try going to the link I provided in the article (to Seeking Alpha) or you could go directly to hardassetsinvestor.com.  

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#6) On January 13, 2009 at 1:17 PM, cornhead64 (< 20) wrote:

I do raise corn, and while there are hybrids developed to increase ethanol production, most plants don't acknowledge their use.  I think we only eat 7% of our corn crop, so I confess, I am pro-ethanol.  That said, there has been a huge negative campaign against its development, including counting the energy it takes to drive to your seed dealer in the fall and discuss hyrbrids to plant the following year ?  Let's be real, do we calculate the millions and billions pounds of force that was need to squeeze the oil shale into oil ?

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#7) On January 13, 2009 at 1:19 PM, cornhead64 (< 20) wrote:

The VeraSun deal was bad, we contracted most of the crop in that $5-$7 dollar range, and aren't going to get crap.  You're right with Monsanto, their pricing went from around $200 a bag to over $300 for the latest technology.  Put that over a 1000 acres and do the math.

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#8) On January 13, 2009 at 1:23 PM, cornhead64 (< 20) wrote:

Most farmers are not going to pay the extra money for the high-oil or extra-ethanol hybrids, simply because they don't get more for it when you go sell it.  Confidential, one corn salesman said there isn't much difference in them anyways.

As usual, the food folks are coming out good again, record profits for Kraft and like when we are suppose to be down.  A question, are prices in the stores dropping where you are ? 

 

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#9) On January 13, 2009 at 1:48 PM, angusthermopylae (38.86) wrote:

cornhead64,

I've been speaking from what little personal observation is available to me and what I've been trying to put together from news reports.

As I said, I see a tumultuous time for corn and beef production--feast and famine as everything settles out.  This doesn't mean a smart man can't make money; it just means that the timing, markets, and production will have to be planned carefully.

Do you see it differently?  I'd like to hear from someone who is knee deep in it.  Only 7% consumption sounds like there is a lot of potential to cover food shortages (if it gets worse and the industrial uses flop over the next year or two.)

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