PRICE VOLATILITY IS HERE TO STAY
WITH CORN PRODUCTION setting new all-time average yield and new aggregate production records, the North American corn industry has experienced an extraordinary ride from 2004 to 2009. During the same years, corn prices set new all time record highs. The United States Department of Agriculture (USDA) estimates that US 2009 average corn yield will shatter the record set in 2004. The expectation among some market analysts is that corn (and wheat) prices will hold steady to lower over the next year or so in the face of the large 2009 harvest and improved ending stocks.
Where does the corn industry go from here in the short term (next year) and medium term (next two years)? Understanding discernable trends, threats and future opportunities is integral when looking at the future of the North American corn industry. Many factors can be expected to influence the future of the industry including energy costs, yield, inflation, changes in the international market and environmental policy.
IT’S ALL ABOUT ENERGY
Corn production costs and corn prices have been tremendously influenced by rising energy costs, primarily crude oil and natural gas, from 2004 to 2009.
Higher input costs and increased usage of corn for ethanol production in the US are both primarily the result of an incredible rise in energy prices during the past five years. The cost of energy will continue to have a major impact on the cost of producing corn and the price of corn itself.
As the global economy continues its recovery from the recent economic meltdown and the world’s appetite for energy increases, expect to see energy prices climb and as a result, increasing input prices. Higher energy prices will improve biofuel industry margins and will almost certainly encourage further expansion, particularly in the US, thereby increasing the demand for inputs such as corn.
EXPANDING AVERAGE YIELD
As a counter balance to energy as a price support, higher yielding seed varieties may lead to higher average corn yields. Some industry sources indicate that US average corn yields may approach the 200 bushels per acre range within the next five years. If achieved, this will be a major increase in corn supply that will go a long way to counter balance any increase in usage and could dampen upward price pressure.
INFLATION AND COMMODITY PRICES
Since late 2008, the Central Banks of most of the major world economies have been carrying out major monetary expansion. In addition, Canada, the US, UK, China, the European Union and many others have executed vast economic stimulus plans that involve running up major fiscal deficits. Simply put, many countries, Canada included, are spending a lot more than they bring in and in some cases, they are simply printing more money. Common sense indicates that the world economy is heading for a period of high inflationary pressure. Gold prices already indicate that the market is anticipating inflation.
The Central Banks will certainly try and control inflation with higher interest rates but past experience indicates that we should expect a period of inflation that will impact US dollar denominated commodities such as crude oil, base metals and agricultural commodities such as corn.
CHINA AND INDIA
The expanding economies of China and India, which encompass about a third of the world’s population, continue to be a monumental medium to long term factor in determining the future of the North American corn industry.
Chinese and Indian consumption of commodities continues to be strong as they build infrastructure and as the standard of living of their populace strengthens.
As a result of increasing living standards and better infrastructure, expect protein consumption in these two countries to continue to rise. Analysis of China’s consumption trajectory leads some to conclude that China will become a net importer of corn sometime in the next six to 10 years.
GREENHOUSE GAS REDUCTION, CARBON SEQUESTRATION AND TRADE
Significant US policy tools to achieve greenhouse gas (GHG) emission reduction targets is carbon sequestration, a technique of using plant matter such as crops and trees to capture and store carbon dioxide. Also, included in US policy tools is the relatively new idea of carbon credit trade. Agriculture may be in a unique position to be involved in both carbon sequestration and carbon credit trade and US policymakers haven’t overlooked the industry.
Parts of these policy tools call for major reforestation with carbon capturing tree crops. Some studies and models imply movement of crop land into forestation to the tune of 80 million acres over the next 20 to 30 years.
Other models and estimates indicate farmers may be able to benefit in the range of $180 to $300 per acre per year through agriculture based carbon trade income. If farmers can achieve such revenues by switching land use to relatively low cost forestry what does that imply for traditional cash crops? More information on US GHG policy can be found in the US Environmental Protection Agency report at http://www.epa.gov/ sequestration/greenhouse_gas.html.
UNDERSTANDING THE FACTORS
While some of the more obvious factors have been covered above, there are certainly going to be additional factors impacting the corn industry that cannot be predicted.
Factors we already grasp lead us to conclude that higher price volatility is here to stay. Big up and down swings in commodity prices, exacerbated by the activity of speculators, can be a problem or an opportunity for corn farmers. Financial success will likely depend on planning and pricing discipline. As the old adage goes, those who don’t plan to succeed are planning to fail. •