Corn supply scenarios for 2011-12 are sobering, and there’s no cushion for drought, with little to no corn available above pipeline levels – the amount of corn needed to keep the marketing chain of corn working.
What are the odds for a drought? According to meteorologist Dr. Elwynn Taylor at Iowa State University, over the last 800 years the longest time between major droughts in the Midwest was 23 years. The last major agricultural drought in the U.S. Corn Belt was in 1988. So, this year would tie the record.
Although the lack of a drought for an unusual number of years does not mean that any particular year will experience one, it is probable that a drought will happen sooner rather than later.
This year would be a particularly bad year to have a drought, due to an extremely tight supply of corn predicted for the end of this crop year on August 31. It is now apparent that on that date there will be little or no extra corn above pipeline levels. What are the potential effects of a drought on corn yields? How low could production go?
Calculating the effects of droughts, floods
To understand the potential effects of a drought on U.S. corn production, a good source of information is a paper written by Drs. Good and Irwin of the University of Illinois and published as a Marketing and Outlook Brief on March 2. That paper contains a graph on corn yield that is different from most yield-trend graphs. The graph de-trends corn yields and puts 2011 technology into every year since 1960. The result is a graph which clearly shows the effects of droughts and floods – and years with perfect growing conditions as well – on yield.
The graph shows that if a drought like that of 1988 were to happen in this crop year, corn yield would drop to 125 bushels. A minor drought would drop yield to 150. A flood like that of 1993 would reduce yield to 135 bushels. On the other hand, perfect weather would bring yields up to 172. Based on this graph, all the yield numbers between 125 and 172 should be included in any scenario-building exercise. Taking the March 31 planting intentions report number of 92.2 million acres planted to corn, the scenarios shown in the table, “Corn supply scenarios for 2011-12,” paint a sobering picture for corn supply and demand.
Sobering corn supply scenarios
In the current crop year (2010-11), the ending inventory of corn will be at pipeline levels. As a result, the total use of corn in crop year 2011-12 can be no greater than harvest (without imports).
In the best-case scenario, a yield of 172 bushels, the price of corn might drop to an average of $5.50 per bushel as higher production allows for increased use, increased exports and increased ending inventory. Trend yield of 159 bushels (which have to be considered the most likely) will lead to a harvest no greater than the total use of corn this year, and the average price would end up even higher than this crop year.
In the worst-case scenario, a serious disruption in the amount of grain available will send prices soaring. The price of corn would have to rise to the level where the federal government relaxes the mandatory use of corn for ethanol. In addition, a significant early slaughter of animals would take place, and exports would be severely restricted. Thankfully, this last scenario, although possible, is unlikely.