Following last week’s USDA Supply and Demand report, which provided a more clear look at the potential for the 2007 corn crop, market activity has been strong on both sides of the unchanged mark. Is that an indication of the volatility in the months to come, as the market enters its second demand-driven crop?

Several of the Cornbelt Extension Outlook Specialists have published their weekly newsletters, providing considerable insight, and providing some guidance to refine marketing plans. Tomorrow we’ll look at soybeans, but the spotlight today is on the corn market.

“Corn has been the main focus of grain traders in recent months and will continue to drive the markets,” says Mike Woolverton at Kansas State University. Woolverton, Darrel Good at the University of Illinois and Chris Hurt at Purdue have contributed their analysis of the corn market this week. Woolverton says the USDA report came at the time many farmers were trying either catch up with planting or make strategic decisions to plant beans on either failed wheat acres or unplanted corn acres. He says USDA’s reduction of the national yield estimate from 154 down to 150 reflects the slow planting progress.

Darrel Good says the revised yield estimate is the product of a new econometric model that includes planting progress, July rainfall and temperature, and a trend variable, “The methodology differs from that of last year that based the yield calculation on a “linear trend fit over 1960-2005 (1988 omitted), adjusted for 2006 planting progress”. The projection this year is about two bushels less than expected by the market, but is about 1.5 bushels above a projection based on the simple linear trend from 1960 through 2006.” And Good says regardless of the model, July and August weather will determine the size of the corn crop.
Purdue’s Chris Hurt agrees to a great extent, saying that spring planting weather will determine 1/3 of the yield, and the balance will come from summer weather, “Planting dates, while statistically significant, only explain about 1/3 of the variation in final yields. Weather for the rest of the growing season is the primary factor that explains the remaining 2/3’s. Thus, while our best expectation of national yield has been lowered, the biggest factors to influence final yield will remain the weather still to come.”

Of course the size of the crop, now estimated at 12.5 billion bushels, is still a function of acreage and Hurt says he’s not convinced the US will plant over 90 million acres of corn as USDA projected at the end of March, and believes about one million of those acres will slip away from corn, “First, soybean prices are stronger relative to corn compared to when the plating intentions survey was taken, providing some incentive for lower corn acres. Secondly, delayed planting in the Western Cornbelt will result in some shifting to soybean acres.”

The push for so many acres of corn is from the demand for ethanol, which Good says is expanding significantly from 2006, “Most of the increase in processing use is from a 1.25 billion bushels (58.1%) increase in the projection of corn used for ethanol production.” That would raise the corn demand for ethanol to 3.4 billion bushels, a large number, but not large enough for Chris Hurt, “My calculations show that the industry may have the capacity to use over 4.0 billion bushels of corn. This is based upon plants under construction coming into production in12 months and all plants running at 100% of capacity. Certainly, all ethanol plants may not run at 100% of capacity if corn prices are very high and ethanol prices decline as expected this fall and winter.”

With corn prices remaining in a range that is 10% under the $4 mark, Hurt thinks they will generally stay there for a while, “I would see the market as having strong support at recent lows with upside potential remaining. July futures have traded in the range of $3.60 to $4.00 awaiting further indications for direction. That may be the trading range for the next few weeks until more planting is complete and prospects for summer weather begins to be better defined.” Darrel Good says USDA is expecting new crop corn prices to range from $3.10 to $3.70, with the average farm price for the new crop at $3.75 per bushel. And with global supplies of corn down, Woolverton at Kansas State says we’ll have a volatile weather market this summer, “Even with the record crop in the U.S., global supply of coarse grain is expected to decline by about three percent this year setting the stage for corn price spikes on weather events as the U.S. crop passes through the critical stages of reproduction.

Purdue’s Hurt, who says he’d be 25-35% sold in the new crop believes marketing opportunities will present themselves over the summer, “Prospects are still in place for much higher prices this summer (poor weather) and somewhat lower prices (favorable weather). However, the downside price risk seems to be more limited by the recognition that the ethanol sector will continue to provide a solid base under prices.”

Summary:
The 2007 corn crop is being planted at a faster pace than several weeks ago, but observers debate whether the late planting will hurt the overall yield. USDA has revised downward its projection for the year, but says demand will consume all but nearly one billion bushels of the 12.5 billion produced and keep market prices tightly connected to crop weather events.