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OUTLOOK IN FOCUS: Solid demand underpinning grain prices

OUTLOOK IN FOCUS: Solid demand underpinning grain prices

Corn and soybeans, absent another major supply-side disruption, will remain softer in 2014. However, stocks remain very tight, historically speaking.

CORN and soybean harvests are nearing completion in the U.S., with 84% and 91% of the crop gathered, respectively, as of Nov. 11, according to the U.S. Department of Agriculture. By all indications, the crops are among the largest – and in the case of corn the largest – U.S. crops ever grown.

With corn production falling just shy of 14 billion bushels and soybean production increasing significantly from last year’s drought-devastated levels, prices have fallen sharply for both staple feed ingredients. USDA’s Risk Management Agency set the harvest price for corn at $4.39/bu., down 41.5%, and soybeans at $12.87/bu., down 16.4% from a year ago.

Unless the U.S. or South America face another yield-robbing weather event in the next 12 months, prices are expected to remain softer, at least relatively speaking.

“The sharp decline in 2013 corn prices is totally attributable to a 2013 bumper crop and resulting increased grain stocks,” said economist Thomas Elam with FarmEcon in Carmel, Ind. “Higher prospective stocks have reduced corn prices to levels near those seen at similar stocks/use ratios of 2007 to 2009.”

But Elam said that while corn prices are softer, they have not necessarily returned to a level they would have absent the demand from the ethanol sector. The livestock industry consultant examined the relationship between grain stocks to use ratios and plotted price trends to determine the “ethanol effect” on corn prices, finding that higher levels of ethanol production and prices are supporting 2013/14 corn prices “at about twice the level than the underlying pre-2006 relationship between stocks/use and corn price would indicate.”

His analysis underscores the ongoing tensions between corn producers and livestock producers on the issue of ethanol. Livestock feeders have struggled in recent years due to record-high grain prices pressuring margins into razor-thin levels – or in many cases completely into the red.

On the other hand, recent projections from University of Illinois professor Gary Schnitkey point out that breakeven prices for corn and soybeans have increased such that those producers could be the ones struggling to turn a profit in the next few years. According to Elam’s figures, if ethanol were not part of the picture, corn and soybean producers would almost certainly be looking at negative margins next year based on Schnitkey’s breakeven prices.

Listen to agricultural economist Dr. Thomas Elam discuss his projections for the 2014 corn and soybean outlook, including his analysis of ethanol’s role in underpinning corn prices, in a special Outlook edition of the Feedstuffs In Focus podcast. The Nov. 11 edition features Feedstuffs’ annual special Outlook report and the podcast series will focus on a different piece of the outlook puzzle each day this week:

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