By Jon Scheve, Superior Feed Ingredients, LLC
The April 9 USDA report seemed to factor in a 50% ethanol grind reduction for at least March and April. There may need to be more reductions in future reports if shelter in place continues. The USDA also increased feed usage, likely to make up for reduced DDG production and consumption. With what we know today, these adjustments appear reasonable.
Reduced gas consumption due to shelter in place orders will likely impact corn prices for the rest of the year. Normal gas consumption is unlikely for quite some time, and many are hopeful it will be back to at least 80% by the end of summer.
With potentially less ethanol consumption, demand for corn will fall. The estimate from the March 31 USDA report of 97 million planted corn acres could lead to nearly 3.7 billion bushels of carryout next season. If reached, this number would be double the 2019 projected carryout reported only a month ago and would suggest that corn prices are overvalued in the long term.
Since 2014, U.S. farmers usually plant around 90 million acres of corn. 2016 was an exception when 94.5 million acres were planted. Current USDA estimates are based upon market conditions from early March, but a lot has happened since then. Historically the planted acres don’t drop much from March to the June reports, but it’s been anything but normal this past month. So, I think it’s unlikely there will be 97 million corn acres reported on June 30.
Most farmers likely won’t switch corn acres to beans for several reasons. One, bean prices aren’t at profitable levels yet. The second is that trade with China is still uncertain. Third, most farmers are creatures of habit and generally don’t change planting rotations regardless of prices.
But there will be a few that do switch acres. Some might be trying to reduce input costs. Others may try to improve their acre mix after last year by putting more beans back in the rotation now that prices for corn are below breakeven. I wouldn’t be surprised if 2 million to 3 million corn acres flip to beans this spring.
Last May, farmers that were considering prevent plant (PP) opted to get acres planted in less than ideal conditions when futures prices exceeded $4.25, because many thought $5 or higher would be attainable. This year with prices a $1 per bushel lower than last spring and well below breakeven, some farmers may try to take PP to minimize losses.
However, conditions across Iowa, Illinois, Nebraska and parts of Indiana aren’t nearly as wet as last year, so taking PP there will not be possible. On the other hand, parts of North Dakota, Minnesota, Wisconsin, Michigan, South Dakota, and Ohio could have cold or wet conditions persist until each state’s planting deadline. It is possible 3 million to 4 million acres could eventually go to PP.
Last year everyone was shocked by how many corn acres were eventually planted. This year, maybe we will all be surprised by how many acres won’t be planted to corn, if conditions aren’t nearly perfect.
The last month illustrates how much people can change their ways when faced with adversity. In early March, the U.S. coronavirus mortality rate estimates exceeded 500,000, so large-scale social distancing was mandated across much of the country and around the world to “flatten the curve.” Since this drastic action was taken, and people started staying home, the number of expected deaths is now much lower.
Farmers are resilient too and when faced with unique challenges, they think creatively and adjust. As society has used social distancing, the past month to meet the challenges of this virus, I would assume we’ll see farmers find ways to overcome the challenges they are facing right now too. Maybe that involves planting a little less corn.
The possibility of $2.75 corn, and a 3.7-billion-bushel carryout, could lead farmers to change their behaviors and actions. Between a switch of corn to bean acres and PP there is a possibility of up to a 7 million acres reduction in corn plantings by the end of June. Now, I’m not suggesting we will definitely lose 7 million acres, only that it’s theoretically possible. That probably still doesn’t mean $4 corn with the ethanol demand problem, but it could mean we won’t hit $3 either.
There are still many other variables that could impact the market this year including weather issues, the value of the dollar and what happens with the virus moving forward. Even with so much bearish news this past week, corn probably could have traded down to $3, but it’s managed to stay above $3.25 so far. Could it mean that maybe things aren’t going to be as bad as many are making it seem?
Please email firstname.lastname@example.org with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.
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