Who's right about corn prices?
There is considerable difference of opinion about the prospects for corn prices beyond the current marketing year. Those differences are illustrated by the contrast in price expectations reflected in the USDA's baseline projections released last week and the current price structure in the corn futures market.
While somewhat dated, the USDA baseline projections suggest that the average farm price of corn will be near $3.50 for the next five years. In contrast, the current futures market points to an average farm price between $4.40 and $4.50 over the next four years. Other price projections are even more extreme than these two examples, particularly on the low side. The USDA projections will be updated at this week's Agricultural Outlook Forum. The forecast of the average farm price for the 2014-15 marketing year will likely be increased from the projection of $3.65 in the baseline projections due to smaller supply projections. Projected stocks at the start of next year will be smaller than in the baseline projections, and the forecast of planted acreage may also be smaller. The smaller supply projection, then, would point to smaller year-ending stocks and a higher average price.
Differences of opinion about the level of corn prices in the more distant future seem to reflect differences of opinion about a number of fundamental supply and demand factors. There are two issues on the supply side. One is the expected level of corn yields, and the other is the expected response of corn acreage to changing corn prices. Corn yield expectations are generally based on an analysis of trend yields. It might be expected that trend yield analysis would result in very similar estimates of the magnitude of the trend yield for the current year and the rate of increase in that trend. That is not the case for at least two reasons. First, the calculation of trend yield depends in part on the time period over which the trend is calculated. For example, we use the period starting in 1960 to calculate the trend in U.S. average corn yields. Using a longer or shorter time period could result in a different calculation of the rate of increase in corn yields over time and therefore different projections of the magnitude of the trend yield over the next few years. Second, the calculation of trend yield depends on whether the trend is calculated using actual (unconditional) historical yields or whether the trend is calculated using conditional yields. In the latter case, the trend yield is calculated after adjusting historical yields for factors such as variations in growing season weather conditions from year to year.
The USDA baseline yields reflected a trend yield of 165.6 bushels per acre in 2014 and an increase of 2 bushels per acre per year going forward. In contrast, our forecast of the trend yield for 2014 is about 2.5 bushels less than the USDA projection. With harvested acreage of 85 million acres, for example, the difference in yield expectation represents a difference in expected production of about 212 million bushels.