After you sold your 2006 corn for $2.25 to $2.50, then watched the market hit $4, your New Year’s resolution was probably to never again sell corn too early. That’s fine. That might be a good resolution for your 2009 to 2015 corn crops, but what about your 2007 corn. What is your marketing plan? Are you assured of $4 prices through the rest of the calendar year? Could large acreage, good weather, and a slow down in ethanol plant construction weaken prices? Before too long you’ll need to seriously think about managing your price risk if you have not done so already. Now may be that time!

The US and the world are hungry for your corn, and with demand surpassing the supply from the 2006 crop, last year’s big crop wasn’t big enough. University of Illinois ag economist and outlook specialist Darrel Good’s quarterly outlook says you might have planted more corn, if there had been better communication between the market and farmers last spring. “The market failed to recognize the extent of the cost increase to produce corn relative to the cost to produce soybeans. These incorrect market signals in terms of resource allocation may become more frequent as nontraditional traders dominate the corn and soybean futures market.”

Farmers cannot be responsible for the traders’ technical charts, but farmers can look at the market fundamentals to become comfortable with the needs of the market. Let’s look at several of those:

Exports. A little over a year ago, the corn export market heated up. Sales of the 2005 crop were the largest in 10 years. The pace of exports has remained healthy, and USDA predicts 2.2 billion bushels will be exported from the 2006 crop. Watching the weekly sales statistics, Darrel Good says we remain on track for that goal to be reached. “On the surface, it appears that exports should easily reach the USDA projection. Uncertainty centers around how much the higher corn prices may influence new sales. It is possible that importers purchased U.S. corn early in the year in anticipation of higher prices and that new sales will now decline dramatically.”

Feed and residual. At the last USDA stocks report, which was based on the December 1 corn inventory, the supply was 9% less than the same period the prior year. Based on exported and processed supplies, the disappearance can be attributed to what was fed to livestock, but Darrel Good calculates there was 3% less fed that during the same period a year ago. “On the surface, larger livestock inventories might suggest a year-over-year increase in feed and residual use. Use last year totaled 6.141 billion bushels. Higher corn prices, however, are expected to reduce the rate of corn feeding.” Good believes livestock will consume slightly less than 6 billion bushels of the 2006 crop.

Domestic processing. USDA’s estimate is for ethanol to consume 2.15 billion bushels as part of the total 3.5 billion for all seed, food, and industrial purposes. That would be nearly 19% more than last year. Ethanol’s consumption of corn is increasing at a rapid rate due to new production facilities being completed. When that happens, ethanol will need 4.2 billion bushels of corn. Good says there is a question about just when the plants will all be in operation, but they could need more corn than USDA currently anticipates.

Total. Five months into the marketing year for the 2006 crop, corn demand appears to be about 11.795 billion bushels. Since that is more than the 10.535 billion bushels produced, stocks will be drawn down to 717 million bushels which is 6% of the projected use. The projected marketing year average price is $3.00 to $3.40. Good says the first half of the crop was probably sold at an average of $2.70, so the last half will have to average $3.70 for the entire year to average $3.20.

The 2007 corn crop. Current prices are signaling that more acres of corn need to be planted in 2007, which will come from a variety of crops, including wheat and soybeans. Since the price of soybeans is less than twice as much as that of corn, many Cornbelt farmers will be able to justify increasing corn acreage at the expense of soybeans. But how much is needed and what price will support that size of crop without hurting demand? Darrel Good suggests that price would be in the $3.00 to $3.50 range, retaining a 6% stocks to use ratio, and that would allow a trend yield to produce a 12.6 billion bushel crop on 81.3 million harvested acres.

Beyond 2007. Your 2008 corn crop and beyond will be determined in a large part by the expansion of the ethanol industry, and that depends substantially on the price of oil. Darrel Good says, “There is no reliable way to forecast the price of unleaded gasoline. However, there should be some concern about the ability of ethanol prices to maintain the current premium to unleaded gasoline prices once production is sufficient to exceed mandated levels and all MTBEs are replaced. Production beyond that level would theoretically be sold only if the price is competitive with unleaded gasoline.” Currently, ethanol is selling at $2.43, compared to unleaded gas at $1.69. Good says with the BTU adjustment and the blender tax credit, ethanol should be comparatively priced at $1.64, about 70 cents under current prices. Finally, the rated of ethanol expansion will be determined by political goals and the impact on food prices.

Marketing plan. With those market fundamentals in play, how do you create a marketing plan for the 2007 corn crop? Many farmers have already sold 2007 production, and others are awaiting higher prices. If you are in the later group, here are some ideas for managing your price risk, compliments of Darrel Good:

1. Plan on buying a revenue insurance product with a high level of coverage, particularly if December 2007 futures prices remain high through February. Those insurance products will be relatively expensive, but will likely provide a reasonable guarantee of profitable returns for the 2007 crop.
2. Price a portion of the 2007 crop prior to the release of the USDA’s March 30 Prospective Planting report in case it shows extremely large corn planting intentions.
3. Price another portion of the 2007 crop using options strategies. For example, buying December 2007 put options with a strike price of $3.90 for $.40 per bushel, and selling December 2007 call options with a strike price of $5.00 per bushel for $.17, would establish a minimum futures price of $3.67 and a maximum futures price of $4.77.
4. Consider establishing the basis on some of the 2007 crop if bids reflect a strong basis. A large increase in production and a good growing season could result in a shortage of permanent storage capacity in the fall, even with the construction of new capacity over the next 8 months.

Summary:
Miscommunication between farmers and the market may have created a smaller 2006 corn crop than was needed. That crop is being fed to livestock at a healthy rate, shipped abroad at an even healthier rate, and processed into ethanol at an unbelievably still healthier rate. But prices may be slowing down some of the consumption, and the next major determinant of 2007 corn prices will be the USDA’s planting intentions report at the end of March. There are a variety of marketing options for producers to use to protect their potential corn profits, which incorporate timing, the basis, options, and managing revenue risk.