Prepared by University of Illinois

The USDA now estimates the 1997 U.S. corn crop at 9.312 billion bushels, slightly larger than the September estimate of 9.268 billion bushels, but well below early season prospects of a 9.7 billion bushel crop. Expanding livestock production, particularly hog production, suggests that domestic feed use of corn will increase to a record level. A smaller foreign coarse grain crop and indications that China will slow its export program, and perhaps begin importing U.S. corn, improves prospects for U.S. corn exports during the current marketing year. Stocks of corn at the end of the 1997-98 marketing year are expected to be smaller than stocks at the beginning of the year as consumption is projected to exceed production. Year ending stocks are expected to represent only about 9 percent of annual consumption, very low by historic standards. Unlike some other years when inventories have been reduced to low levels, supplies this year are adequate to accommodate a significant increase in consumption. Significant price rationing of available supplies is not required. The small level of ending stocks becomes problematic only if production shortfalls occur in 1998.

Corn prices are expected to average near $2.80 per bushel during the 1997-98 marketing year. With the price already at that level at harvest, the “typical” post-harvest price increase will require additional changes in supply or demand prospects. The production uncertainty generated by the El Nino weather pattern and the trade policies of China will be important to price direction.

The supply of corn available for use during the 1997-98 marketing year consists of beginning stocks, production, and imports. Stocks of corn on September 1 totaled only 884 million bushels, 57 million less than the USDA projection prior to the release of the September 1 Grain Stocks report on September 30.

The 1997 corn crop is now estimated at 9.312 billion bushels, 44 million less than the September estimate and only 19 million larger than the 1996 harvest. In general, the crop is slightly larger than the 1996 crop in the east and slightly smaller in the west. An array of private estimates prior to the release of the USDA report had lead the market to believe that the crop was near 9.4 billion bushels. The crop is expected to be essentially unchanged from last year's production even though harvested acreage is estimated to be up by 902,000 acres. Acreage harvested for grain is at the highest level since 1985 and at third highest level.

The U.S. average corn yield is estimated at 125.8 bushels per acre, 0.6 bushels above the September estimate and 1.3 bushels below the average yield of 1996. The average is 3 to 4 bushels below trend and 12.8 bushels below the record yield of 1994. The potential benefit of early planting in 1997 was lost to slow crop development due to cool spring weather and to relatively large areas of dry weather in July and August. State by state average yields in the seven largest producing states show a checkered pattern compared to last year's yield:

State		1996		1997

Illinois	136		129
Indiana		123		120
Iowa		138		140
Minnesota	125		130
Nebraska	143		132
Ohio		111		130
Wisconsin	111		124

Less than 10 percent of the crop had been harvested at the time the USDA collected the data for the October production estimate. Harvest in most Midwest states was less than 5 percent. As a result of the small amount of harvest data, there is room for the production estimate to change in November. Over the past 25 years, the November production estimate has been smaller than the October estimate only 5 times. Except for 1990, those years (1973, 1983, 1990, 1993, and 1995) tended to have low yielding crops. There has not been any year in those 25 when the production estimate increased in October (as it did this year) and then declined in November. Our expectation is that the November estimate this year will be very close to the October estimate, in a pattern very similar to that of 1991.

With imports of about 10 million bushels of corn, the total supply for the 1997-98 marketing year is estimated at 10.2 billion bushels, 477 million (5 percent) larger than last year's supply. Supplies were larger only in 1992 and 1994.

While the production of corn in 1997 is about unchanged from that of last year, production of other feed grains is down. Production of oats is estimated at 176 million bushels, up from 155 million last year; barley production totals 374.5 million bushels, down from 395.8 million; and sorghum production is estimated at 664.5 million bushels, down from 803 million in 1996. Total feed grain supplies (stocks, imports, and production) are estimated to be 3.3 percent larger than last year's supplies.

The feed and residual use of corn in the U.S. first exceeded 5 billion bushels in 1992-93. Use in that category was record large, at 5.523 billion bushels, in 1994-95; declined to 4.682 billion in 1995-96 due to reduced supplies, strong export demand, and high prices; and recovered to 5.368 billion bushels in the 1996-97 marketing year. Domestic feed and residual use during the past year was slightly higher than the late season projection of 5.3 billion bushels.

Feed and residual use of corn during the 1997-98 marketing year should be supported by a number of factors, including expanding livestock and poultry production and smaller supplies of sorghum. The USDA's September Hogs and Pigs report indicated that a significant expansion in hog production is on the way. Pork production is expected to be nearly 9 percent higher in 1998 than in 1997. The increase reflects an increase in sow farrowings, an increase in the number of pigs produced per litter, and a slight increase in carcass weights. Total poultry production is projected to increase by 6.2 percent, lead by a 6.5 percent increase in broiler production. Beef production is expected to decline by about 2 percent in 1998. However, the number of cattle on feed is currently higher than that of a year ago, so feed demand will be strong for the first quarter of the 1997-98 corn marketing year.

The feed and residual use of sorghum is expected to decline by about 100 million bushels during the 1997-98 marketing year. If feed requirements increase in line with the 3 percent increase in livestock and poultry production and 100 million bushels is shifted from sorghum to corn, feed and residual use of corn would be near 5.65 billion bushels in 1997-98. There is so much variation in the rate of feed and residual use of grain per animal unit, that a forecast based on animal numbers alone is not very accurate.

Feed grain consumption per animal unit tends to be large when grain supplies are abundant, feed prices are low, and livestock feeding is profitable. Low feeding rates occur when supplies are small and feed prices are high. For the year ahead, feed supplies appear abundant, but prices are expected to be higher than in similar supply years. Livestock feeding profitability, particularly for hogs, is expected to decline over time. Production intentions may be reduced somewhat from current projections. For now we are projecting feed and residual use of corn at 5.6 billion bushels, just over 4 percent more than used this past year. If last years use was overstated due to new-crop supplies being pulled into the 1995-96 marketing year, our projection may be too high. The first check on the rate of feed and residual use will be provided by the December Grain Stocks report, to be released in early January.

Domestic processing uses of corn in 1996-97 rebounded from the price-induced decline of 1995-96. Preliminary estimates put use at 1.69 billion bushels, just short of the previous record established in 1994-95. Use was apparently very large in the fourth quarter of the 1996-97 marketing year, slightly exceeding the record of two years ago. The continuation of the tax subsidies for ethanol consumption should ensure a continued increase in processing use of corn during the current marketing year. A continuation of the longer-term trend increase in domestic processing use would project use for the current marketing year at 1.77 billion bushels.

Exports during the 1996-97 marketing year were disappointing, at only 1.79 billion bushels. Much of the decline from the previous year was due to Chinese trade. Chinese imports declined from 58 million bushels to 3 million and exports increased from 9 million to 157 million bushels. Larger, coarse grain crops in the European Union, Canada, and South America also created more competition for U.S. corn. For the current marketing year, foreign coarse grain production is expected to be down nearly 20 million tons, or about 3 percent. The largest decline is in China, with reductions also expected in South America and Canada. Those reductions should improve U.S. exports during the 1997-98 marketing year. Further increases in wheat production, however, may provide some competition for corn demand. The crop was especially large in China, Eastern Europe, and the former Soviet Union. Significant declines occurred, or will occur, in areas that expanded production last year–Canada, Australia, and Argentina.

Export sales of U.S. corn have started slowly for the 1997-98 marketing year. As of October 2 only 436.5 million bushels had been sold for export, about 36 percent below the rapid start of last year. Sales have been much smaller than a year ago to most Asian destinations. Sales are down 76 percent to South Korea, 28 percent to Taiwan, and 23 percent to Japan–destinations that bought a lot of U.S. corn early last year. In addition to a more typical purchasing pattern by those countries this year, sales are down due to continued competition from Chinese corn. China has exported 1996 corn at a rapid pace and at relatively low prices even though the soon to be harvested crop is at least 18 percent smaller than last year's harvest. The reasons for the aggressive export policy are unclear, but probably reflect logistics as much as anything else. Recent rumors that China has, or soon will, discontinue export sales, fueled speculation that China would import U.S. corn later in the marketing year. Even though export sales have started slowly, export shipments of corn have started rapidly, through the first 5.5 weeks of the marketing year, shipments totaled 185 million bushels, 44 percent more than during the same period last year.

For the year, we are projecting corn exports at 2 billion bushels, but are not very confident about that projection. Actual exports will be influenced by Chinese trade decisions and by southern hemisphere grain production. We are retaining a conservative estimate until evidence of stronger exports materialize. The persistence of the El Nino weather pattern suggests that some further extreme weather conditions could also develop. Dry conditions have already adversely effected prospects for some crops in southeast Asia. Grain production in South America and South Africa could be impacted.

To reach the projection of 2 billion bushels, an additional 1.564 billion bushels of corn need to be sold for export. That is an average 32.9 million per week through August 1998. Export shipments will need to average 39 million bushels per week.

Based on supply and consumption projections developed here, inventories of corn at the end of the 1997-98 marketing year will be reduced to 836 million bushel, or 8.9 percent of the projected use. Low carryover stocks are the result of modest production and increased use, much like last year. Low stocks are not the result of small crops and the need to reduce consumption, like 1993-94 and 1995-96. The price implications are important. At this juncture, it does not appear that prices have to go to levels high enough to discourage consumption. If that continues to be the case, we expect a season's average farm price near $2.80.

The events of recent weeks–confirmation of hog expansion, smaller than expected September 1 stocks, rumors that China will discontinue export sales, the smaller than expected U.S. crop estimate and El Nino concerns have resulted in a counter seasonal price increase for corn. December futures rallied from a low of $2.555 on October 2 to a high of $2.95 on October 13. Based on current futures prices (October 13) and typical late season basis levels, the market is offering the producer a marketing year average price of about $2.85 per bushel. Summer delivered prices are near $3.00. The market has clearly built in a lot of friendly expectations. Additional price strength may be limited until some of those expectations begin to materialize. A failure of export sales to increase, a larger production estimate in November, or disappointing feed use could all result in a modest price decline. Technically, resistance should be found in the December contract near the early spring high of $2.98 and the contract high of $3.10 (reached in August 1996). Support should be near $2.60.

To date, the lowest cash price (overnight bid) in the central Illinois corn price series. As reported by the Wall Street Journal, was $2.435 on October 1. That may be the low price of the marketing year. There have been 8 times in the past 15 years when the lowest cash price was established in September or October. In those 8 years, the highest cash price was reached in June of the next year 3 times, July 2 times, and August 2 times. The highest price ranged from $.445 above the low price (1990-91) to $2.525 above the low price (1995-96). The average was $1.18 per bushel. The average excluding 1995-96 was $.99 per bushel. So far, the October price rally this year has pushed the central Illinois cash price $.30 above the October 1 low. If that low is indeed the marketing year low, the spot cash price would be expected to move above $3.00 at some time during the marketing year.

The surprising strength in corn prices at harvest time offers producers an excellent opportunity to make catch up sales and avoid storage costs on a portion of the crop. Past price history and the uncertainty about global demand and weather conditions, however, suggests that some ownership should be retained at current price levels.

October, 1997 Darrel Good, Extension Economist

University of Illinois, Urbana, Illinois

Consensus National Futures and Financial On Line Index

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