Even before the current U.S. Farm Bill was adopted, we shared our concern that a $4-plus plateau in corn prices, which was being widely predicted, was in all likelihood no plateau at all.
A year ago many were predicting corn would average $4.50 a bushel, partly because of ethanol demand and partly because production costs had increased so much in recent years. We were doubtful.
Even so, we were shocked, but not surprised, to see a newspaper headline announcing corn prices that were well below the $2 level. It was news of an elevator in the Minot, N.D. area that priced corn at $1.73 per bushel. Yes, you are reading that number correctly — $1.73 as the result of a $1.50 negative basis on a $3.23 futures price.
And that $3.23 itself is 20 per cent below the supposed $4-plus plateau.
We agree that it took a combination of circumstances to bring about a -$1.50 basis — an anticipated bumper crop, railroad problems, full elevators, and the lack of local demand — but circumstances will not pay the bills no matter how they came about.
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And it is not only in North Dakota that we are seeing situations in which farmers are facing an unusual basis. Coming from the upper Midwest we always watch the prices and basis (generally negative) in those areas. And living in Tennessee, we also watch the prices and basis in west Tennessee (generally positive). During the first week in October 2014, both areas showed a negative basis in the range of 30 to 40 cents.
All of this raises the question of what the next couple of years are going to look like.
An examination of the 1995-2001 period may give us a hint. Between the high prices we experienced in 1995 and the lows that began in 1998, corn year-ending stocks increased from 426 million bushels to 1.8 billion bushels and the season average price paid to farmers (basis included) tumbled from $3.24 to $1.94 and $1.82 the following year. This time around we have seen ending stocks increase from 821 million bushels to over two billion bushels and the price has plunged.
Without increased demand or significantly reduced supply, the price in the 1998-2001 period remained below $2 for the whole period. The year-to-year variation in year-ending stocks made little difference. It was only the ethanol mandate and the subsequent demand for five billion bushels of corn for ethanol production that lifted corn prices out of the doldrums.
Prices next year are likely to remain low even if stocks drop a little. It seems that it takes a constant stream of bullish news to keep prices up — like increasing demand for corn for ethanol production. It doesn’t take bearish news to keep prices down, only the absence of news of a sharply reduced supply or a significantly increased demand.
And if prices remain low, the current configuration of farm policies may not provide the kind of help farmers will need.