Corn usage and production mismatch will play out in a classic supply and demand interaction in 2007, with higher corn prices likely to reduce livestock production usage.

The USDA projects the consumption of U.S. corn at 11.89 billion bushels for the current marketing year, 624 million above the record consumption of last year. However, if the U.S. crop comes in significantly smaller than the current forecast of 10.905 billion bushels, consumers of corn will have to adjust.

"It is rare that the U.S. crop is small enough that total supply, which is production plus carryover stocks, is small enough to require a reduction in consumption from the level of consumption during the previous year," said Darrel Good, University of Illinois Extension economist. "It happened only four times in the past 30 years: 1983-84, 1993-94, 1995-96, and 2002-03."

Consumption was lower than the previous year on five other occasions, but supplies were large enough in each of those years to accommodate an increase in consumption. For the current marketing year, supplies are not small enough to force a year-over-year reduction in consumption, but may be small enough that consumption will have to be less than currently projected.

The USDA will release a new forecast of the size of the crop on November 9 with the final production estimate to be released on January 12, 2007.

"Expectations are that the November U.S. average yield forecast will be 1.5 to 2.5 bushels below the October forecast of 153.5 bushes per acre, resulting in a production forecast of 10.73 to 10.8 billion bushels," Good said.

"With 45 percent of the crop rated in good condition and 18 percent rated in excellent condition at the end of the season, a yield near 152 bushels would be expected," he said.

"With September 1, 2006 stocks of 1.971 billion bushels, a crop of 10.765 billion bushels, imports of 10 million bushels, and consumption of 11.89 billion, stocks at the end of the current marketing year would be reduced to 856 million bushels, or 7.2 percent of projected use."

Good says the experience of 1995-96 suggests that a minimum pipeline supply at the end of the year is about 5 percent of consumption, equivalent to about 600 million bushels this year. At this juncture, potential supplies appear adequate to allow consumption at the projected level, but concerns about the 2007-08 marketing year will persist.

Historically, adjustments to shortfalls in U.S. corn production were primarily in the domestic feed and residual category of use.

"In the four years in the past 30 years that supplies were small enough to force a year-over-year reduction in use, feed and residual use declined by an average of 11.3 percent, in a range of 5.1 to 15.2 percent," Good said.

The largest year-over-year decline in feed and residual use in recent history was 17.9 percent in 1988-89.

"Ironically, corn supplies were large enough that year that a reduction was not required. Prices over-reacted to the extremely small crop, forcing a larger than required reduction in use. The quarterly pattern of decline in feed and residual use was not consistent over the five years mentioned here, occurring early in 2003-03, late in 1983-84, and more uniformly in the other three years," Good said.

In the four years of forced reduction in corn consumption, U.S. exports were larger than the previous year twice in 1983-84 and 1995-96 and lower twice in 1993-94 and 2002-03. Exports were influenced by the size of the world feed grain crop and the strength in demand in importing countries, not just the price of U.S. corn.

"There has been only one year in modern history with a year-over-year decline in domestic seed, food, and industrial use of corn. That was 1995-96, when use declined by 87 million bushels or 5 percent. Most of the decline was in the fourth quarter, following historically high prices in the spring of 1996. The use of corn for fuel alcohol declined by 137 million bushels or 25.7 percent during the 1995-96 marketing year, while corn used for food and beverage products increased by 42 million bushels or3.5 percent," Good said.

The adjustment to a possible shortfall in U.S. corn production would likely occur in the domestic feed and residual category. This adjustment will, in turn, be affected by livestock prices and timing and magnitude of corn price increases.

The response to a possible shortfall in U.S. corn production is less predictable in the export market, depending greatly on the availability of other feed grains worldwide and the strength of the world livestock markets.

"Domestic processing usage would be the least responsive to supply shortages and high prices. Corn for ethanol production, in particular, would likely not decline as it did in 1995-96, if crude oil prices remain at or above current levels," said Good.

The USDA's December Grain Stocks report, scheduled for release January 12, 2007, will provide information about how domestic livestock producers are responding to the high price of corn.

Producer decisions about 2007 crop acreage will be the first indication of whether or not a corn supply problem can be anticipated any time soon.

"A report of intended corn acreage will not be released until March 30, 2007, but the January 12, 2007 Winter Wheat Seedings report will provide some important information about supply response to higher prices," Good said.