If you follow corn, not just the current price, but the growing season as it unfolds, then you know this year is shaping up to be a bin buster.

Planting began and finished at record pace. There was plenty of moisture and warm temperatures in the Corn Belt early on. By the middle of June, 77% of the nation’s crop was rated as Good or Excellent.

That’s one reason both cash prices and corn prices continue below last year’s average.

Harvested acreage of corn for grain is expected to total 81.8 million acres, 2.2 million acres larger than in 2009, said Darrel Good in June. He is an agricultural economist at the University of Illinois. The U.S. average yield is projected at 163.5 bu, second only to the record of 2009, resulting in a record production of 13.37 billion bu. However, consumption is forecast at 13.41 billion bu, resulting in a 30 million bu year-over-year reduction in ending stocks.

All told, the June World Agricultural Supply and Demand Estimates pegged the season-average corn prices for the 2010-2011 marketing year at $3.30-$3.90/bu.

Last year’s crop was one for the books, too.

“As a result of record yields and large acreage, production of both crops (corn and soybeans) was record large in 2009,” Good explained.

Corn production last year was estimated at 13.11 billion bu, Good explained. That’s 72 million bu more than the previous record in 2007. By way of comparison, soybean production was estimated at 3.359 billion bu, 162 million bu above the previous record of 2006.

Depending on perspective, corn isn’t cheap, exactly, but at a level making for profitable cattle feeding breakevens (see Beyond Record Cattle Prices page 18).

Eat, Heat and Fuel
The reason corn prices are that high, relative to the sea of corn, is that corn consumption also continues at a record pace.

According to Good, corn consumption for all purposes is projected at 13.19 billion bu for the current market year (2009-10), 1.134 billion bu above consumption of a year ago; 453 million bu above the previous record of 2007-08. The year-over-year increase in consumption is led by an expected 873 million bu increase in the amount of corn used for ethanol production. Year-ending stocks are projected at 1.603 billion bu, 70 million bu smaller than stocks at the beginning of the year.

So, according to the USDA forecasts in June, consumption of U.S. corn during the current marketing year will exceed production. A similar supply and consumption pattern is forecast for the 2010-11 marketing year.

Snugging up what’s left of any wiggle room, looking at cumulative export inspections through June 10, Good explained exports could be more than expected. Through April he said Census Bureau export estimates exceeded USDA estimates by 72 million bu.

One saving grace is that the Environmental Protection Agency (EPA) delayed until September the expected summer announcement for an increase in the ethanol blending rate from the current 10% level to as much as 15%. Any increase, drives up corn usage exponentially.

The National Cattlemen’s Beef Association (NCBA) submitted comments to EPA last July opposing the proposal by the ethanol industry to raise the ethanol blend rate percentage to 15%.

“Changes made to the ethanol blend percentage will impact all industries that rely on corn, not just the ethanol industry,” said Kristina Butts, NCBA manager, legislative affairs. “Before considering raising the blend percentage, the government should first take a serious look at how it would affect corn and cattle markets, and whether corn production would be able to keep pace with a higher mandate.”

According to NCBA, projections indicate that increasing the blend percentage from 10% to 15% would require an immediate 4.5 billion gallons of ethanol, and would require approximately 1.6 billion bushels of corn—which is nearly equivalent to the amount of corn used by the cattle industry in an entire year.

“Cattle producers support energy independence and the development of the renewable fuels industry,” Butts continued. “What we don’t support are government mandates that disrupt the market and favor one industry at the expense of others. All we’re asking for is a level playing field.”

As it is, Good explained, “The bottom line is that another record U.S. corn crop will be required in 2010 to accommodate growing consumption.”

Riding the Demand Bull
Back in March, Good and fellow Illini agricultural economist, Scott Irwin, analyzed the economic impact of a corn production shortfall. One of the reasons for the analysis is that they say there is a growing confidence among producers and policy-makers that increasing corn yields due to plant technology are akin to bulletproof.

“The general lack of concern about a weather-induced shortfall in U.S. corn production suggests that market participants and policymakers may be ill-prepared to cope with such a shortfall should it occur, somewhat like the price spike of two years ago that caught participants off-guard,” they explain.

In their paper, Alternative 2010 Corn Production Scenarios and Policy Implications, they developed three alternative corn yield scenarios, assuming no change in policies affecting corn consumption. One scenario was for the U.S. trend yield (156.7 bu/acre), one for a trend arrived at by modeling good weather history (172.5 bu/acre), the other trend arrived at by modeling poor weather history (134.5 bu/acre). The poor weather scenario reflects those one-in-ten anomalies. They point out an extreme weather year (one in 30) results in estimated yield of 123.6 bu/acre. For their calculations they used a planted acreage of 89 million acres, with a harvested acreage of 81.8 million acres. Acreage was estimated because the actual numbers won’t be known until after this year’s harvest.

Under the poor-crop scenario, Good and Irwin calculate corn production for 2010 would be 10.962 billion bu, 2.169 billion bu less than last year’s record crop.

“Historically, the largest reduction in corn use during years of shortage occurs in the domestic feed sector,” explain the economists. “The demand for corn in that sector is more price elastic than in the export sector or the domestic processing sectors. That is, consumption is more responsive to price in the feed sector than in other sectors.”

In the poor-crop scenario Good and Irwin calculated, the market year average price would be near $5.75/bu. and daily high cash prices in the Corn Belt could be upwards of $7/bu, similar to price levels experienced during the commodity bubble year of 2007-08.

That price level would encourage livestock liquidation say the researchers, likely at a steeper rate in the past if corn production declines significantly in the next couple of years.

“Livestock producers would likely respond to short supplies and high prices of corn more quickly in the next year or two than in the recent past,” say Good and Irwin. “Low livestock prices and high feed costs over the past two years have resulted in operating losses and an erosion of equity for many producers. A period of high corn prices now would likely result in significant financial stress on many producers of livestock and livestock products resulting in substantial liquidation of livestock numbers and a decline in production of meat and milk.”

SIDEBAR: Corn Belt Droughts Less Frequent
“Historically, a drought like the Dust Bowl would happen every 100 years, but what we’ve found is that modern droughts are shorter and can be more severe,” says Keith Cherkauer, assistant professor of agricultural and biological engineering at Purdue University.

Cherkauer and his graduate student, Vimal Mishra, used historical data from the National Climate Data Center to model the likelihood of future droughts in Illinois and Indiana, two of the nation’s key corn producing states.

In studying precipitation data from 1916 through 2007, Cherkauer and Mishra found that only one severe drought (in 1988) occurred since the Dust Bowl era of the 1930s. During that time, Indiana and much of northeastern Illinois have trended toward more precipitation during the crop-growing season from May to October, a positive for corn and soybean growers.

“There is less chance of having widespread, extreme drought,” Mishra said. “We may have drought, but the tendency is that we’re getting more precipitation during the crop-growing season.”

Cherkauer and Mishra predicted future drought conditions by studying historical precipitation trends and inputting soil moisture and stream flow data into what’s called the Variable Infiltration Capacity Model, which simulates how precipitation moves through land surface environments.

Despite the past and predicted rarity of drought conditions in these states, Cherkauer emphasizes future droughts are most likely to occur during the later part of the crop-growing season, when the plants need moisture to produce grains.

“Yields are also much higher than they were during the Dust Bowl, so the impact of the damage would be worse,” Cherkauer says.