Expect lower, but volatile grains markets in 2009-10

Any disruption in energy supplies could affect oil prices, which in turn affects corn prices, largely due to the growth of the ethanol industry. As long as oil prices remain close to present levels, “I don’t think we’ll have any problem with corn prices going up from here, but who’s to say there’s not going to be another Middle East war or Venezuela decides to cut off oil exports, a revolution in Venezuela, Nigeria, whatever," said Tom Elam, president of FarmEcon LLC. "Oil is incredibly sensitive to supply disruptions. Where oil goes, so goes ethanol and so goes corn. The big joker in the deck is oil prices.” As a result, he doesn’t rule out corn going above $6 given the right—or wrong—set of circumstances.

Elam continued, however, that oil demand is down everywhere with the “first contraction in the world economy since the Great Depression.” Oil demand is particularly down in developed countries “and we’re not done yet.”

"If oil stays in the $40 to $60 (per barrel) area, cash corn, central Illinois bid, will trade in a $3.25 to $4.25 range with 145 to 155 bushel yields in 2009 and 2010. If 2009 yield is below 145 you might tack on 50 cents per bushel to corn, but if oil is in the range above you can't go much higher because ethanol plants start to go offline unless the Renewable Fuel Standard mandate becomes a major factor. Given the 1.6 billion to 1.7 billion carryover forecast from the 2008 crop I doubt that this will be a major factor. If oil goes above $60, you can start to see a repeat of 2008." He adds that volatility will likely decline much from extreme level of 2007-08, "but will still be much higher than 2005-06."

Going into 2009-10 for corn, there is lower feed demand, lower exports, but a substantial increase in corn for ethanol due to the Renewable Fuels Standard. Elam added, however, that the United States has “some fairly good carryover supplies of corn and beans.” And that is likely to temper the impact of weather on markets.

At this point in time, Elam does not see any major shifts in spring planting of corn and soybeans as “they’re competing pretty equally.” But he added that there could be somewhat of a shift to beans because it has lower input costs, and farmers are in the same credit crunch as everyone else.

Michael Donohue, an economist with Agri Stats, said at the conference that “we’re down to $4.50/bu. corn and thinking that’s pretty good. It’s going to be a long time before we get back to $2.60 corn given ethanol, given the Renewable Fuels Standard. Feed costs are going to be very volatile in the foreseeable future.”