by Bob Sampson, University of Illinois

Market participants and policy makers should be aware of the consequences of a large shortfall in U.S. corn production in 2007 and begin making plans even if that outcome is unlikely, conclude two University of Illinois
(U of I) agricultural economists.

"At this stage of the 2007 growing season, there is certainly no indication of a substantial shortfall in U.S. corn production, nor are we predicting such an outcome," said Darrel Good, U of I Extension marketing specialist who with his Department of Agricultural and Consumer Economics colleague Scott Irwin prepared a recent report on the topic. "Discussion of market and policy implications of such a shortfall, then, may appear to be premature, unrealistic, or event alarmist.

"However, it is important to recognize potential worst-case scenarios and that history indicates that production shortfalls as large as 30 or 40 percent, though unlikely, are possible. By thinking ahead, market participants and policy makers can develop plans to manage such shortfalls and consider appropriate policy responses."

In their report, Good and Irwin outline the current conditions in U.S. markets where corn prices are especially sensitive to the prospective size of the U.S. crop in years when stocks are relatively low and/or in years of robust demand for corn.

"During those periods, a substantial shortfall in production would be very disruptive to the corn market, require significant adjustments by end user, and have the potential to increase food prices," said Good. "Instances of substantial shortfalls in the size of the U.S. crop when stocks were low and demand was strong have been rare, 1974 and 1995 are two examples, but years with the potential for such an occurrence have been more numerous.

"The current year is one of those years."

Today's U.S. corn market is driven by four factors: rapidly expanding consumption due primarily to more corn being used for ethanol production; declining inventories; high prices; and reported intentions to increase planted acreage.

The report outlines a number of production scenarios that could occur in the 2007 crop year and estimates consumption and price implications of those scenarios.

"Our study suggests that, based on historic production patterns, there is an 80 percent probability that the 2007 crop will be between 10 percent smaller than expected and 16.7 percent larger than expected," said Good. "Production in this range would likely have few, if any, policy implications.

"Larger shortfalls in production, however, might be more problematic due to the small level of old crop stocks on hand at the beginning of the 2007-08 marketing year and the very robust demand for corn expected from the ethanol sector. An important public policy question, then, is with an extreme shortfall in production, would the market be allowed to allocate the crop among users or would such a shortfall in corn production induce government intervention?"

Normally, the market has been allowed to sort out the problems with the largest adjustments taking place in the livestock sector.

"There has been one exception. Short supplies and high soybeans prices in 1973 resulted in an embargo on U.S. exports," said Good. "Such an embargo on corn exports might be considered, but the potential negative impact on longer-term trade relationships would make an embargo a very unpopular alternative."

Aside from the need for market participants and policy makers to begin at least thinking about potential serious shortfalls in 2007 corn production, Good and Irwin conclude the present situation has other policy implications.

"Corn prices are expected to remain generally high and extremely volatile for an extended period of time," said Good. "The combination of a low level of stocks and an increasing portion of corn consumption occurring in the ethanol sector, where demand is relatively price insensitive, suggests that prices will be extremely responsive to small changes in U.S. and world production prospects or changes in demand for corn in any other sector. Prices of other commodities will also be influenced.