Outlook: Corn: Energy Prices Drive Demand

With low carryover stocks, the supply cushion in case of a production shortfall in 2009 is thin.

Published on: Jan 6, 2009

Mark Welch, Texas AgriLife Extension & Kim Anderson, Oklahoma State University

In 2008, we saw the highest corn price in history (December corn in Chicago traded at $7.96 on June 27th), the second highest average corn yield ever (153.8 bushels per acre, only 2004 yielded higher at 160 bushels per acre), and total corn production was the second largest crop on record (12.02 billion bushels, behind the 13.07 billion bushel crop in 2007 when we harvested 8 million more acres).

As impressive as the corn production statistics have been the last few years, our rate of corn use most years has exceeded supply. Carryover stocks of corn at the end of the marketing year are trending down and the ratio of ending stocks to total use is down to 9%. In only two marketing years in the last 40 have stocks-to-use ratios been lower, 5% in 1995/96 and 8% in 1973/74.

The driving force of corn demand has been ethanol. Since the passage of energy legislation that included mandated amounts of biofuel to be blended into the nation's gasoline supply, corn used for fuel has increased to 4 billion bushels per year, about one third of total production going to make ethanol. With an increasing dependence on fuel use to sustain demand, corn prices are becoming more closely linked to the energy markets. Whatever happens in the crude oil market is of increasing importance to corn producers.

Crude oil prices are also a barometer of world economic activity. Declining oil demand and lower crude oil prices are a sign of slowing economic conditions. Increasing demand and higher prices are signals that economic activity is growing. Corn use in the other categories, particularly feed use, will benefit from economic growth as that translates into increased demand for protein and dairy products. From the standpoint of demand, the degree to which corn prices rebound in 2009 depends on what happens in the crude oil market.

But with low carryover stocks, the supply cushion in case of a production shortfall in 2009 is thin. With rising input costs and lower prices relative to last year, producers will be taking a hard look at projected returns from alternative crops. It may be that lower input use crops like soybeans or wheat may be more attractive when costs are high and credit is tight. Any cutback in corn acres given growing demand from the energy sector will increase the need for another bumper corn crop.

In addition to concern over planted acres, tight supplies and growing demand will focus attention on weather prospects for 2009 as well. It has been 20 years since the last major drought affected the Midwest and many analysts are concerned we are overdue for a reoccurrence. Whether we do or not, market volatility is likely to be created in the wake of weather concerns which may provide the opportunity to price 2009 corn at profitable levels. Of course, the only way to know what those profitable levels are is to have a well developed crop budget that estimates breakeven levels for your farm.