Some bullishness expected to continue in U.S. corn market

November 4th, 2013

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Category: Grains, Oilseeds

(Southeast Farm Press) – Some economists have predicted recently the bull market in corn might be reversing to a two to three-year bear market.

Not so fast, counters Mark Welch of Texas A&M University.

“It’s not necessarily over, and I can make the case for volatility, both on the production and the price side,” says Welch.

Judging from world per-capita consumption, it’s a good time to be a grain farmer, he says. “Grain use actually can go down in a recession, but that didn’t happen in the greatest recession since the Great Depression. We blew through that as if it was standing still. We were stepping up consumption prior to corn-for-ethanol making the difference that we’ve seen over the last several years. And that gave us the impetus to carry through the latest recession,” says Welch.

Even though the U.S. is making up a smaller percentage of world corn production, it is still the No. 1 producer and No. 1 user, though exports took a hit this past year, he says.

“We still set the stage for the world corn market. The estimate of 371 kilograms per person in per-capita consumption is a projection in light of the fact that we’ve capped off growth in ethanol. Our livestock numbers are down, but we’re still seeing worldwide growth in per capita consumption. There’s a lot more going on than just ethanol, and that’s what will carry us forward and provide that demand base which will provide for higher prices as we move into the future.”

World per-capita consumption for corn has grown by 28 percent and soybeans by 26 percent over the past 10 years, says Welch.

“World per-capita consumption of wheat is up 3.6 percent, when we are increasing our feed grain supplies and relying less on wheat as a feed grain. If you go back two or three years, consumption patterns of the food grains increase in wheat was flat – zero percent growth over 10 years. Now we’re seeing an uptick in wheat and in rice. So we’re seeing very strong consumption patterns in feed and food grains.

“In that 10-year period when we’ve seen rapid growth in feed grain consumption, where has the consumption come from? All of the growth and then some have come from corn. Everyone wants to be a corn producer, and everyone wants to buy corn.”

Buyers less sensitive to price

Economically speaking, the buyers and users of corn are becoming less sensitive to price in making their purchasing decisions, he says. They want corn, and they’ll do whatever they can do to get it.

“The inverse of that inelastic demand curve is that as we see buyers being less sensitive to price, it means that with very small changes in supply, we see a magnified impact on price. Price is becoming much more responsive to relatively small changes in supply. That is a component of our grain marketing that is going to stay with us for a considerable period of time.”

We’ve built a grain industry around a single crop, says Welch. “Users like the production they get out of corn and the reliability they get out of utilizing corn for rations or ethanol, and that’s increasing throughout the world. That’s a major driver of the volatility we’re seeing in prices.”

In looking at prices paid to farmers for corn going back to 1866, two economic principles are very evident, says Welch.

“No. 1, a price change due to a change in demand is usually sustained for a relatively long period of time. The second principally is equally important – a price change due to a change in supply is usually short lived. There’s a great deal of volatility in this new higher average price for corn.”

Over the last several years, he says, there have been several consecutive disappointing corn crops in the United States while world corn production continues to set records.

Turning to supplies and the days of use on hand at the end of the marketing year, Welch says the U.S. is expected to rebound to the 10-year average with a 60-day supply of corn on hand on Aug. 31, 2014. This will mark the end of the 2013-2014 marketing year.

“If we make a record crop in the U.S. and record crop worldwide, we may get back to the 10-year average.”

U.S. corn-use categories have been driven by fuel use in the past several years, he says. “We’ve heard the case of increasing livestock numbers. We expect continued growth from the feed side of corn use as livestock producers have responded to more profitable conditions and increasing beef consumption in the U.S. and worldwide.”

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