Who's right about corn prices?
The second corn supply issue is the likely responsiveness of corn acreage to the level of corn prices, and more generally, the responsiveness of total crop acreage to the level of crop prices. Both corn acreage and total crop acreage increased with the higher level of crop prices beginning in 2007. The higher crop prices were generated by rapidly growing ethanol demand for corn, increasing export demand for soybeans, and periodic yield shortfalls. With lower prices being offered for 2014 crops, the questions are: Will total acreage of spring planted crops decline from that of 2013? and What share of the acreage will be planted to corn? Most seem to believe that both corn acreage and total crop acreage will decline this year. Beyond 2014, the acreage response to the level of and mix of crop prices will continue to be important. The USDA baseline projections reflect expectations of declining acreage in response to a relatively long period of low prices.
From the demand side, differences of opinions about future corn price prospects basically reflect a difference of opinion about the responsiveness of corn consumption to the price of corn, that is, the price elasticity of corn demand. Corn demand is generally thought be fairly price inelastic, requiring a relatively large price change to alter consumption. With large crops, then, it is argued that prices will have to be "low" in order to stimulate sufficient consumption to prevent a build-up in stocks to unacceptably high levels. However, the responsiveness of corn consumption to lower prices during the current marketing year, particularly in the export sector, is very encouraging. If corn demand is more price elastic than generally believed, large crops would result in less price weakness than reflected in some of the very low projections being offered.
While a return to the high corn prices of the past three years is not expected any time soon, a combination of more modest trend yields and more responsive consumption suggest that larger crops would not be as bearish as reflected in some of the more extreme price forecasts.
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