Fall 2005, Vol. 11 No. 4
In this issue...
Agricultural Situation Spotlight: Corn Prices, Basis, and Transportation
Corn Prices, Basis, and Transportation
Chad E. Hart
Tun-Hsiang (Ed) Yu
Corn prices in Iowa are being beaten down by consecutive years of exceptional production, high fuel prices, and the effects of hurricanes Katrina and Rita. Last year's record national and Iowa corn production has been followed by the second-highest corn production for both the nation and the state. In 2004, the United States produced 11.8 billion bushels of corn, with Iowa producing 2.24 billion. In 2005, the United States is projected to produce 10.9 billion bushels of corn, with Iowa producing 2.15 billion. This increased production has translated into larger corn stocks. In September 2004, national corn stocks stood at 960 million bushels, with Iowa holding roughly 25 percent of the total. By September 2005, corn in storage nationwide had jumped to 2.11 billion bushels and corn stored in Iowa had risen to nearly 500 million bushels.
Managing Overflowing Corn Stocks
This storage left a tremendous amount of corn supply hanging over the corn market, which held down corn prices. The impact of this supply has been felt in several ways. First, a sizable portion of the corn in storage was held under the marketing loan program. At the end of August and beginning of September, many producers in Iowa and across the nation were at or nearing the end of their nine-month loan period, at which time the producer must decide whether to repay the loan or forfeit the crop to the government. In what looks like an attempt to reduce the probability that producers would find crop forfeiture the better choice, USDA began to manipulate the repayment rates (known as posted county prices) on marketing loans in September 2005. When the posted county price is below the crop loan rate, producers who have a marketing loan can capture a marketing loan gain. (This is the difference between the loan rate and the posted county price, which is the same calculation that creates the loan deficiency payment for producers who do not choose to take a marketing loan.)
In Iowa, the usual pattern is that all counties have the same marketing loan gain or loan deficiency payment rate on a given day. Throughout September 2005, the usual pattern did not hold. Posted county prices were set to avoid crop forfeitures and this created county differences in marketing loan gains (MLGs). Figure 1 shows the per-bushel MLGs for corn in Iowa on September 19, 2005. Instead of a uniform rate across Iowa, there were differences of up to 12¢ a bushel across the counties. However, as the harvest season has progressed, the normal MLG pattern has returned.
Large Supply Affects Basis
The corn in storage has also affected the relationships between Iowa cash corn prices and other corn markets. Figure 2 shows the difference between Iowa state-average cash corn prices and the nearby futures contract price (price differences like this are referred to as basis). The black line shows the 1999-2004 average basis levels during the year. Typically, Iowa corn priced on the cash market runs 30¢ per bushel below the Chicago Board of Trade nearby corn futures price. So far, the pricing pattern for 2005 is following the pricing relationship we saw in 1999. Then, the basis widened to nearly 60¢ per bushel around harvest time before recovering at the end of November. But given the potential size of the Iowa corn crop this year and the amount of last year's crop still in storage, the ability for the basis to strengthen this year is limited.
Figure 3 displays the basis between Iowa cash corn prices and corn export bids out of New Orleans. The black line again shows the 1999-2004 average basis, which ranges from 45¢ per bushel in late April to 60¢ per bushel from harvest time to the end of the year. The thick gray line marks the lowest basis levels over the five-year period. As the graph shows, this basis widened to its largest margin at the end of 2004 and has continued to be extremely weak throughout 2005. Every basis observation for 2005 has been below the lowest basis level for the same date in the 1999-2004 period. The gap in the basis data for 2005 around the end of August is due to Hurricane Katrina and the closing of the export facilities in New Orleans. Following the resumption of activity at the port of New Orleans, this basis widened to over a dollar per bushel, a record gap between Iowa cash corn prices and corn export bids.
Shipping Costs Swell with Supply and Fuel Costs
Much of the weakness in the basis between Iowa cash corn and corn export prices can be linked to the rise in the cost of shipping corn from Iowa to the export markets. Figure 4 shows per-bushel barge rates to move corn from eastern Iowa to New Orleans. The grain barge rates are generally higher during harvest season. Barge rates are not reported from late December to the first of March due to ice buildup on the Upper Mississippi River. Barge rates shot up in mid-September 2004 and have been consistently above average since then. The pressures of large corn and soybean crops--combined with barge traffic near or at capacity on the Upper Mississippi River, increased competition on covered barges from imported non-grain commodities (such as steel), lower water levels due to drought, and higher fuel prices--drove barge rates up. These pressures have continued through 2005 and have been intensified by the potential size of the 2005 crops and the double-barreled impacts of Hurricanes Katrina and Rita, limiting barge movement and fuel supplies.
As of early October, only 15 percent of the capacity in the Port of New Orleans is up and running. Barges cannot unload grain shipments because of damaged freight terminals, which has delayed the movement of barges back up the river and consequently limited barge supplies for farmers in the Midwest. In simple economic terms, given the limited supply of barge space and the increased demand for that space from strong crop production, barge rates (the price for barge space) had to increase. Fuel cost increases in the barge industry are passed on to the farmer in the competition to obtain barge space. The effects of the hurricanes just exacerbate the problem. Barge rates are not the only transportation costs that have skyrocketed. Agricultural commodities shipped by truck and/or rail face many of the same issues: limited transportation supplies and higher fuel costs.
Low Prices, Higher Support
All of these factors point to a continuation of low crop prices in Iowa and the nation over the near term. USDA is currently projecting a season-average farm price of $1.90 per bushel for the 2005 corn crop. This would be 16¢ per bushel below the 2004 crop year price and 52¢ below the 2003 crop year price. Price support government programs, such as the marketing loan and countercyclical payment program, will likely provide a significant amount of support to the farm sector in the coming year. ♦