BY LYDIA THEW, Medill News Service
Times of Northwest Indiana
In the face of rising demand, the U.S. Department of Agriculture shaved its projection for this year's corn crop, leading analysts to repeat recent calls for increasing corn acreage.
The booming biofuels industry, global demand and increased investment from Wall Street have created a boon for Midwest farmers, analysts say. The rising prices, coupled with a Democratic shift in Congress, has led some to speculate about possible policy changes in the 2007 Farm Bill, which will determine subsidies to grain farmers for the next five years.
"I think what we're seeing here today is the best opportunity in years for farmers to get some good prices," said Brian Basting, commodity research analyst at Advance Trading Inc. of Bloomington, Ill., in a press briefing at the Chicago Board of Trade. In midday CBOT trading, December 2006 corn futures were trading at $3.52 per bushel, down 6 cents from the previous day's close.
December 2007 corn futures were $3.52 per bushel, down 7 cents.
In the fourth quarter a year ago, corn futures traded between $1.85 and $2.20 per bushel.
On Thursday, the USDA projected 2006 corn production of 10.7 billion bushels, 1 percent lower than last month. Ending stocks were also revised lower to 935 million bushels. Analysts polled by Reuters Group PLC had expected production of 10.8 billion bushels and ending stocks of 924 million bushels.
"This year, we're seeing processors in the Decatur area paying a premium to the CBOT price because they need the grain," said John Hawkins, news service director of the Illinois Farm Bureau. "This time of year, it's almost unheard of because in the middle of harvest, prices are normally at their bottom."
Analysts agree that demand for ethanol has driven corn prices higher, but that a flood of managed money and commodity index funds has boosted commodity prices across the board. The Chicago Board of Trade on Wednesday reported record volume across its agricultural complex, including record corn futures volume and corn options open interest.
Strong demand and high prices should encourage farmers to grow more acres of a given commodity, which analysts agree must happen to meet corn demand.
"$3.50 to $4 in that price level should be the incentive to give us the jump in acres," said Greg Grow, director of agri-business for Archer Financial Services Inc., a wholly-owned subsidiary of A.D.M. Investor Services Inc., at the CBOT briefing.
Grow and Basting agreed the U.S. needs to plant 6 to 7 million additional acres of corn this year, and a total of 10 million more acres over two years, to meet existing corn demand at current yield levels.
Corn futures currently indicate to farmers they can gain $70 per acre in revenue from planting corn instead of soybeans.
Grow warned, "until we have it in the ground... it's going to be hard for the corn market to ease back much to allay the fears of the possibility of demand completely outstripping supply and dragging ending stocks to zero at the end of two marketing years."
With corn prices in the recent $3.59 per bushel range, farmers' pricing and income are driven by market forces, not public policy. "The farm bill is basically irrelevant to most farmers right now with prices where they are," Hawkins said.
A similar situation occurred in the late 1970s and 1990s, when prices were high enough that farmers did not need income protection, Hawkins said.
Part of the prospective farm bill debate revolves around income versus price protection. Existing law subsidizes farmers on a price basis. But looking ahead to next year's bill, a proposed revenue insurance plan favored by some farmers would subsidize farmers based on earnings, instead of setting a price floor.
The challenge of the farm bill, analysts agree, is to balance safety net provisions with market realities. "There's an old saying in farming that high prices cure high prices," Hawkins said.
Mark Lambert, communications director of the Illinois Corn Growers Association, said, "Realistically, with prices this high, it may be a good time to look at developing a more market-oriented farm bill."
A Democratic House and, potentially, Senate, may affect the farm bill debate, but what that means is not yet clear.
"The GOP (may have) more of a market orientation whereas with the Dems you may see the trend toward a greener farm bill with more conservation provisions overall," Hawkins said. "It's one of the few bipartisan areas year in and year out."
U.S. Rep. Collin Peterson of Minnesota is the senior House Agriculture Committee Democrat. Sen. Tom Harkin of Iowa is the ranking Democrat on the Senate Agriculture Nutrition and Forestry Committee.