Following is a summary of corn market analysis and outlook information from Kansas State University to be presented at a series of Kansas Corn Schools in January 2017. Locations are Wichita (South Central KS) on Monday, January 9th, Oakley (Northwest KS) on Wednesday, January 11th, and Olathe (East Central KS) on Friday, January 13th. More information on how to register for these meetings please visist the following web location:
Corn Market Risk Management in 2017
Daniel O’Brien, Extension Agricultural Economist – Kansas State University
A. U.S. and World Corn Supply-Demand & Price Situation.
After producing the four largest U.S. corn crops on record over the 2013-2016 period following the drought of 2012, U.S. corn ending stocks of 2.403 billion bushels in the “new crop” 2016/17 marketing year have risen to a 29-year high, while percent ending stocks-to-use of 16.56 percent have risen to an 11-year high. In this “large supply – low price,” “buyer’s market,” the USDA has projected U.S. average corn prices in market year 2016/17 in the $3.05 to $3.65 range — down for four consecutive years from a record high of $6.89 per bushel in drought-stricken market year 2012/13 to the lowest level since $3.04 per bushel in market year 2006/07. Foreign coarse grain supplies and ending stocks also have reached record high levels in marketing year 2016/17 — up to 1,118 million metric tons — further exacerbating the “large crop – low price” scenario that currently exists in the U.S. and world corn market.
B. 2017 Corn Market Expectations and Contingencies.
Lower U.S. corn prices are likely to prevail through the winter months until at least mid-spring to early summer 2017 unless unexpected and substantial crop production problems occur in other major coarse grain production regions of the world, such as Argentina, Brazil, China, or the Ukraine. It is also possible that the anticipated change in world weather patterns to a La Nina condition could have a negative impact on 2016 South American (particularly in Argentina and southern Brazil) and U.S. corn production in the western Corn Belt. However, tangible evidence of such a crop production impacts will not be available until February-April 2017 in Argentina and Brazil, and later in the summer months in the United States. Also, financial market volatility, trends in the value of the U.S. dollar relative to other world currencies, and other economic factors may affect the U.S. corn market and other agricultural and energy commodity prices in coming months. However, absent any of these surprises to the U.S. and Kansas corn market, in-state corn prices will likely follow the average normal seasonal price pattern of the last 15 years, with harvest lows followed by seasonal increases through spring-early summer 2017, with weather-based market volatility likely to influence U.S. corn prices through the mid-to-later summer months.
C. Kansas Irrigated & Non-Irrigated Corn Cost of Production
Kansas cash corn prices of $2.87 to $3.36 per bushel in mid-December 2016 at major grain markets throughout the state are substantially below Kansas State University estimates of average cost of production from Kansas Farm Management Association enterprise records for the 2009-2015 period. Kansas State University estimates of statewide average irrigated corn cost of production were $4.00 per bushel in 2015, and $4.47 per bushel on average over the 2010-2014 period. For non-irrigated corn, Kansas State University estimates of statewide average cost of production were $4.36 per bushel in 2015 (with much larger than normal yields) and $5.70 per bushel on average over the 2010-2014 period.
D. What signals about 2017 are the CME corn futures markets providing?
As of December 16, 2016, the structure of futures contract prices over the remainder of the 2016/17 marketing year (i.e., through August 31, 2017) provides little or no incentive for commercial storage of grain and is near neutral at best for on-farm storage. On December 16, 2016 CME MARCH 2016 corn futures closed trade at $3.56 ½ per bushel, followed by MAY 2017 CME corn at $3.63 ¼, JULY 2017 CME corn at $3.70 ¾, and SEPTEMBER 2017 CME corn at 3.77 ½ per bushel. Per month futures carrying charges for MARCH-MAY were $0.03375 per bushel, $0.0375 per bushel per month for MAY-JULY, and $0.03375 per bushel for JULY-SEPTEMBER.
If commercial storage costs before interest are commonly $0.04 per bushel per month, then mid- December 2016 CME corn futures carrying charges offer no incentive for storing grain — other than the possibility that local cash basis levels may narrow or strengthen enough to make storage possible. If on-farm storage cost is approximately $0.02-$0.02 ½ per bushel, then on-farm storage (before cost of interest) appears to be a “break-even” to slightly profitable marketing strategy absent any rally in corn futures or narrowing of basis in spring-early summer 2017.
E. Signals from New Crop 2017 DEC Corn & NOW Soybean futures
Concerning new crop 2016 acreage prospects for corn and other major competitive crops, on December 18, 2016 CME NOV 2017 soybean futures closed at $10.16 ¼ and CME DEC 2017 corn futures at $3.86 with a ratio of 2.63. Over time this ratio of soybean to corn prices would be considered to be “favoring soybeans” (i.e., being markedly larger than the customary 2.2 to 2.3 break-even level) —favoring soybeans over corn from an expected profitability standpoint. That said, it is likely that prospects for the South American soybean crop during March-April 2017 will affect both old crop and new crop soybean and corn futures prices in the United States at that time, and could lead to significant changes in relative 2017 prices and expected profits between U.S. corn and soybeans, and ultimately affect U.S. farmers’ 2017 planted acreage decisions.