Every livestock producer is watching the price of corn. So is every ethanol plant manager. And so is every corn grower. The demand-based corn economy we’ve had for the past 8 months has created cost concerns for livestock producers and ethanol plant managers. Much of the concern is based on whether the US will be able to meet the demands of the livestock producer and the ethanol plant. Is it reasonable to expect a crop that will supply the demand, or should we always have “Plan B” in mind? (Whatever Plan B is!)

Most farmers today who climb onto a tractor or put a sharp pencil to paper have never experienced a demand-driven market. After many years of staking off 10-15% of a corn field and planting it in oats, or pledging more land to the Conservation Reserve, or taking the loan price because the market had too much corn, it is difficult to really grasp the meaning of life as it is in today’s farm economy. While some Cornbelt elevators still have corn piles from last year, they are diminishing, and probably by this time next year they will all be gone and elevators will have many empty bins. We won’t be running out of corn, but Miss Supply and Mr. Demand will be dancing closely with each other unlike ever before.

Is it reasonable to always expect a sufficient supply of corn? Iowa State economist Bruce Babcock explores that question in his publication, Corn Shortfalls: Historical Patterns and Expectations. A shortfall is the deviation between actual production and expected levels. Actual production can be measured, but expected level is a bit more ethereal, but Babcock says, “Expected corn production is estimated as the product of U.S. trend yield per harvested acre, U.S. planted acres, and the trend ratio of harvested to planted acres.” He says since 1970 only four crops have fallen short of expectations by more than 20%. And there are fewer crops that have fallen short in the 10-20% range. Most of the shortfall crops have been less than 10% under expectations. 2006 was an anomaly in that trend, since it was a surplus crop, but demand sneaked up and turned it into a shortfall crop.

Despite the efforts of corn breeders to create “drought-proof” hybrids, corn is still subject to yield loss in dry weather. We’ve not had a 1983 or 1988 lately, but dry weather in 2005 in parts of the Cornbelt created many blank ears and cut yields severely. Babcock says as corn is planted outside the fringes of the Cornbelt, the variability of supply will increase.

At this point, farmers have told NASS, and NASS has told the market to expect 90.545 million acres. If 91% of that is harvested, Babcock says the trend yield of 149.4 bushels per acre will produce a 12.3 billion bushel crop. His research indicates a one in 50 chance of that falling below 9 billion bushels, which would equate to a 1988 crop. There is a 12% chance of the crop falling below 11 billion bushels. And he adds, “If the crop does fall short of 11 billion bushels then we should expect corn prices to rise to levels that may cause ethanol plants to shut down. On the other hand, there is a 70% chance that the corn crop will exceed 12 billion bushels, in which case prices will be moderate. Of course if planted acreage falls short of planting intentions, then the odds of high corn prices could grow substantially.”

Summary:
Market prices for corn are currently speculating on whether the 2007 supply will meet the 2008 demand. If acreage needs are not met, then the expected crop will certainly be short of the target. If the yield is not met, then the crop will be short, but just how short will be a function of the efficiency of price rationing. The crop could be short, and in a demand market that will be more serious than in all of the years of recent history in which supply driven markets have established the price.