Here we are in the depths of winter, long before the first kernel of corn will be planted, but thanks to the historical relationship between December corn prices and the previous year’s cost of production as estimated by USDA, we can map out an early landscape of where prices are likely to trade.
Historically speaking, December corn has a long history of trading above its previous year’s cost of production, excluding land, and a 50% premium above that cost. Of course, corn prices can trade far above the 50% premium, especially if weather problems emerge, but this simple model gives us a good frame of reference as we head into 2015.
This model was especially helpful a year ago as December 2014 corn hit a high of $5.17 (61% above cost) on April 9. The high was roughly two months ahead of its 10-year seasonal average, but as corn was planted and no serious weather problems emerged, prices fell from their higher level. The eventual low of $3.18 1/4 on Oct. 1 was nearly ideal by historical standards — just 1% below $3.21, USDA’s 2013 landless cost of production and within days of the average 10-year seasonal low.
For 2014, USDA estimates a cost $516.61 to produce an acre of corn, not including the cost of land; $516.61 an acre divided by USDA’s estimated yield of 173.4 bushels results in a cost per bushel of $2.98. USDA’s yield estimate may change in the Jan. 12 WASDE report, and their cost estimates will be updated on May 15. But until then, $2.98 is the estimated minimum price for December corn in 2015 and $4.47 is the estimated maximum.
This simple model helps us to understand what normal should look like. But of course, markets also have an emotional component, and unexpected events have the ability to take prices beyond the boundaries of their expected range. Until we know more about 2015, this is a good place to start and is historically much more useful than USDA’s average farm price estimate of $3.20 to $3.80 for old-crop corn in 2014-15.
On Monday, December 2015 corn closed at $4.29, or 44% above 2014’s estimated cost of production. That is an attractive value for producers, historically speaking.
However, there is no rush to hedge corn yet with demand off to a strong start in 2014-15 and most expecting a smaller planting in 2015. Time should be on corn’s side for now as the availability of South America’s next crop is still months away and corn’s seasonal high typically arrives in mid-June.
The two big variables for corn prices in 2015 will be weather and external events.
So far, growing conditions in South America have been favorable overall, but there is time for that to change. Likewise, a patch of abnormal dryness in the Dakotas and Minnesota offers little concern several months ahead of planting, but deserves watching. Outside of grains, low oil prices are dramatically changing the world’s flow of money, but so far, grain demand has not been interrupted. Of course, surprises are always possible and we at DTN look forward to helping you navigate the coming events of 2015.
Corn harvest in SE Iowa, late 2014. Photo: Dan Caffrey, @danocaffrey
