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Tuesday, May 31, 2016

Corn Prices to Reflect Summer Wx & Demand Strength

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Corn Prices to Reflect Summer Wx & Demand Strength
Darrel Good, Agricultural Economist - University of Illinois

Summer has arrived and so has the critical three month period in which the nation’s food supply will be established. The commodity markets will follow weather conditions, crop ratings, and weather forecasts in order to form yield expectations. Todd Gleason reports the starting place is typically to assume a normal growing season.

University of Illinois Agricultural Economist Darrel… 3:33 radio
3:48 radio self contained

University of Illinois Agricultural Economist Darrel Good starts each growing season, generally speaking, in the same way. He analyzes the market using a normal growing season conditions. This calculation for corn puts the University of Illinois 2016 national average yield at 166.4 bushels to the acre. One of the factors that influences the direction and magnitude of early yield adjustments is the timeliness of planting, recognizing that yield potential is reduced if planting is delayed beyond the “sweet spot” for obtaining maximum yields. The timing of that sweet spot varies by region says Darrel Good, but Illinois has been using May 20 as the national break point for “late planted corn” since 1986.

Good :23 …yield near trend value should not yet be altered.

Quote Summary - We calculate the percent of the crop planted after May 20 for the 30 years from 1986 through 2015 ranged from four (2012) to 47 (1995) percent and averaged 18 percent. While the percent of the crop planted late in some states (Indiana and Ohio) was well above average this year, the percent of the crop planted after May 20 in the 18 major producing states this year was calculated to be 17 percent. This is very close to the long term average and suggests that the expectation of a U.S. average yield near trend value should not yet be altered.

A second factor Good monitors in order to adjust his yield expectations is the USDA’s weekly crop condition ratings. Those ratings tend to be biased early in the season, with ratings tending to decline as the growing season progresses. Good thinks the early ratings are not always a good forecast of final ratings. Still, the market is interested in the condition of the crop as it compares to ratings in earlier years. Crop conditions ratings have been available for the 21st week of the year 17 times out of the last 30 years. This year makes 18 out of 31. On average, 71 percent of the crop was rated in good or excellent condition for that week, in a range of 43 (2002) to 79 (1994) percent says Good.

Good :38 …ending stocks to less than about 10 percent of use.

Quote Summary - While the market will focus on crop size, it is important to ask how much the price of corn will actually be influenced by the size of the crop. Our recent modelling of the relationship between the marketing year average price of corn and the year-ending stocks to use ratio suggests prices tend to be relatively stable over a wide range of ending stocks-to use ratios. That is, for a given level of consumption, the size of the crop has a relatively small impact on the marketing year average price of corn unless the crop is small enough to reduce ending stocks to less than about 10 percent of use.

Over a wide range of corn supply, the more important determinant of price, writes Darrel Good on the FarmDocDaily website, is the strength of demand. In this case, demand does not refer just to the amount of corn consumed, but instead includes the price users are willing to pay.

Good :15 …demand has been weak for the past two years.

Quote Summary - Strong demand reflects a willingness to pay a “high” price for a given level of consumption while weak demand reflects a willingness to pay a “low” price for that consumption. Corn demand has been weak for the past two years.

The weather-reduced Brazilian corn harvest has recently provided some demand strength for U.S. corn and a modest price rally. Still, as Darrel Good indicated in his FarmDocDaily column last week, summer weather could provide additional price strength, at least temporarily. He says stronger demand, in the form of more robust economic growth and higher livestock prices, would provide for a more permanent price increase.