I guess I am out of the mainstream. The Register said recently that mainstream economists and farmers think that corn prices are too high. They quoted Iowa Ag Sec. Bill Northey saying, “Seven-dollar corn is too high, and even farmers who are selling know it.”
Gov. Terry Branstad concurred, saying, “A price around $4 or $5/bushel is a lot better for everybody. Farmers can make money, but the price doesn’t hurt demand.”
I agree with the premise that if the price of corn goes so high as to destroy significant portions of the demand base, then it is a self-defeating process that offers no value to corn producers. They get one big payday if they have any corn to sell and then the market has to plunge in order to buy back the demand that was destroyed.
It takes so long for demand to recover, that the spike in corn prices that killed demand isn’t worth it.
$7 corn would appear the tipping point. Unless ethanol and livestock prices climbed along with the price of corn, $8 to $9 corn would destroy demand. If there is a real weather problem this summer, even $10 corn is a possibility. As things stand today, $7 corn has not destroyed any demand.
No segment of corn’s endusers stopped using corn just because it was $7. That price is thought of as high because of the perception of what everyone has been trained by experience to believe the price of corn should be after years of $2 corn.
The Chinese, where corn prices already top $9 bushel, think U.S. corn at $7 is commercially priced as they bought some recently. They will be buying more corn.
USDA says that demand, between now and new crop next harvest, exceeds supply by 400 million bushels. Rationing needs to take place. Some demand does have to be delayed, temporarily furloughed or destroyed, but it has not happened yet with $7 per bushel.
The price of corn has not gone high enough to cause endusers to curtail consumption. It likely requires $8 corn to finish the job of rationing tight stocks this summer.
A summer drought or other weather problems threatening new crop will sustain the level of corn prices now perceived by the politicians as too high, a lot longer than the Register found general consensus to believe. I think that it is going to take yet another year to raise production to meet demand.
If the ethanol or livestock industries take a step back from current demand, then I see China stepping up to replace any domestic demand for corn that is lost, waiting to pounce on the opportunity.
A lot of the expansion in corn acreage that was intended this year will not be realized due to the cold, wet spring producing floods, preventing planting. There should be a premium for early-harvested new crop corn this year.
If demand is reduced by 400 million bushels, there will be an 18-day supply in the pipeline on Aug. 31. Weather factors, starting now with the late planting date, will push back the harvest date, so that a critical shortage may develop.
Having gone through the depression of the 1980’s when corn prices traded below the cost of production for so long that many gave up on the future of agriculture, corn prices today are only balancing that low time out. They won’t stay high forever.
After every expansion, there is a bust, but this boom may last longer than most think because:
- Most don’t think it will last long.
- No leverage has been accumulated yet as who would borrow when they don’t think current profits will last? There is no bubble without excessive leverage.
- Even Branstad and Northey think corn is too high priced.
- Endusers have not lost money so no demand has been destroyed.
- It takes a trendline yield just to kick the can down the road another year to another crop relative to boosting the corn supply.
- Food demand growth is so strong that even a slow down in the Chinese economy is unlikely to impact exports greatly.
- Few farmers have any corn left to sell.
- The hog industry is structured contractually so that producers literally have to go broke before they will liquidate and reduce feed consumption.
- It will take as long as five years to bring a significant amount of new land into production in Brazil.
- EU rejection of biotechnology and political risk in Eastern Europe will hamper their ability to boost food production.
- The entire supply chain above the producer was spoiled by 25 years of below-the-cost-of-production, subsidized food costs that make current prices seem high by comparison, but are not.
- Food prices went down for two decades relative to disposable consumer income relative to the cost of everything else, so this quick readjustment is wrenching, but justified.
- Our political leaders may over react to what they see as consensus high prices, manipulate markets with excessive regulation delaying production expansion causing a real world food shortage.
Time and the market will align supply and demand. The price of corn has gotten too high when endusers stop buying it. That has not happened yet.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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