Figuring out why corn futures prices dipped $2/bu. over the past two months may be one of those questions that only time will answer, says Bill Tierney, chief economist at AgResource Company in Chicago.

October 14, 2011

2 Min Read
Corn Prices To Remain High Into Early 2012

Figuring out why corn futures prices dipped $2/bu. over the past two months may be one of those questions that only time will answer, says Bill Tierney, chief economist at AgResource Company in Chicago.

Speaking at the Beef Financial Management Conference in Amarillo, TX, recently, he says grain and cattle prices rise and fall according to supply and demand factors rather than other outside influences.

“I would hope to know in a year what caused the collapse, but I don’t think it had anything to do with macros or hedge funds,” he says.

He believes corn prices will remain “historically high into early 2012 – the only risk is a world recession or depression.”

China will be a key. “Chinese corn prices are at a record-high range of $9.40 to $10/bu. China will secure U.S. corn whenever profits exist, which limits the downside in the world corn market to $6.30/bu.”

Tierney doesn’t anticipate China increasing corn production significantly in the next few years. Their corn production typically occurs on very small acreages, with two- to three-acre fields only in the most productive areas. With relatively small plots, he says, Chinese farmers won’t invest in the technology necessary to increase yields.

And consolidating fields to achieve economy of scale is contrary to government goals. “The Chinese government doesn’t want urban migration. They prefer to keep farms small and more people on the farms. The government prefers to maintain an attractive support price.”

Increasing world demand also will keep corn prices up, Tierney believes. “The world will need to plant an additional 5 million to 7 million acres in 2012 to keep world stocks steady. The world is on a collision course with corn demand outstripping supply and the two largest producers, China and the U.S., having limited ability to expand acreage.”

Tierney says the 2011 U.S. corn crop also will be “relatively poor – I would classify it as a short crop if it’s 10% below the trend.”

He says terrible weather in July, added to planting problems in the Corn Belt, put unusual stress on U.S. corn production. In addition to record heat and drought in the Southern Plains, Illinois had “the warmest July on record; warm nighttime temperatures contributed to low yields.”

The U.S. ethanol industry also will continue to consume a large portion of the annual corn crop, he says. Even though the ethanol subsidy is set to expire Dec. 31, “the mandates keep rising to 15 billion gals. by 2015. At that level, ethanol will consume from 43-47% of the U.S. corn crop.”

Rising costs will be hard on cattle producers who have seen both grain and hay prices skyrocket, Tierney says.

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