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Fundamental Analysis for Corn and Soybeans
By Dr. Robert WisnerUniversity Professor of Economics
Iowa State University
University of Minnesota Master Marketers Conference, Jackson, Minnesota, January 27, 2005
• The process of analyzing supply and demand, developing price forecasts
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Only 2.7 mil. soy A. in highest-risk S.E. U.S.
Estimated Asian Rust Risk
% of years out of 30 that climatic conditions are expected to support Asian soy rust
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Fundamental Analysis• Role in Grain Marketing• Key Concepts• LDPs &Fundamental Analysis• Analyzing Supply • Analyzing Export Demand• Analyzing Domestic Demand• Seasonality• Some Key Web Sites • Current Examples
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Why Forecast?Market Risks are largeBusiness Decisions: based on expected
costs & returns• Crop rotation• How much N to put on corn • Sell @ harvest, store into summer? • Contract for harvest or later delivery? • Size of government payments?• Base decisions on best available
information• More equal buyer/seller information
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Fundamental vs. Technical Analysis
Technical: road map and driving rules for traders as they follow market reaction to Supply-DemandFundamental: anticipating future supply-
demand changes & determining how they will affect prices
In the short run, markets over re-act & deviate from fundamentals, but supply & demand ultimately rule the market
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Role of Fundamental Analysis
• Shows what to watch• Gives guide to market sensitivity• Helps quantify new market impacts• Provides a benchmark price for
plans• Guiding principle: Price influenced
by expected supply and demand
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Objectives in This Session – Understand how good forecasts
are made– Understand limitations of forecasts– Identify good information sources– Provide rules to help anticipate
market reactions– Update on corn & soybean outlook
for 2005-06 and how outlook was developed
– Longer-term fundamentals
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Forecasting Rules– Search for the big picture– New crop futures markets are not
good forecasters– In forecasting, never say always– If you forecast, forecast often – Have a good historical perspective– Be a contrarian: majority is often
wrong– Respect market trends– Inflation seldom increases corn &
bean prices
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Iowa
Wisc.
Ill.
Mo.Kansas
Nebr.
S.Dakota
OhioInd.
Mi.
The U.S. Corn/Soybean Belt
83% of U.S. corn & soybeans are grown outside Iowa
Minn.N. Dak.
Ky.
Col.
Tex.
N.C.Mid-South
.
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Mil. Bu. Change in 2002 Corn Productionvs. 2001 Big picture 2002
+240
+255
-76 -90 -160-238-212
-101
-38
+30
-49
+45+34
+32
+6+17
+16+17
+1
-3
-24
-29-16
-17
-16
-49-16
U.S. -504814 below 2001-02 utilization
-43
Basis Implications!
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• The market guides production• Demand has two dimensions: quantity
& price• Supply is two dimensional: quantity &
price• Market equilibrium: price where
quantity demanded equals quantity supplied
•• If quantity supplied exceeds If quantity supplied exceeds quantity demanded, price declines
Some Principles
quantity demanded, price declines
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FORECASTING PROCEDURE:FORECASTING PROCEDURE:GRAINGRAIN
• Supply, demand, forcompeting products
• Prices influenced by current, expectedfuture conditions
• Grain is a global Market
• Weather: the biggest supply factor• Government policy: U.S. & foreign
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Demand: Two dimensions
Price
Quantity
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Inelastic Demand
Examples?Price
Quantity
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Elastic & Inelastic Demand
Which will cause greatest price sensitivity?
Price
Quantity
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Elastic & Inelastic Demand
Which will cause greatest price sensitivity?
Price
SS1
Quantity
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Elastic & Inelastic Demand
Price
SS1
QuantityIs elasticity of D forcorn changing?
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Elasticity of Demand • Percent change in Quantity
demanded with one percentchange in Price
• Corn: -.5%• Soybeans: -.4%•• Or 1% chg. in corn S = 2% chg. In priceOr 1% chg. in corn S = 2% chg. In price•• 1% chg. In SB S = 2.5% chg. in price1% chg. In SB S = 2.5% chg. in price• With all other market factors
unchanged
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LDP: A Clearance Sale ToolCorn, % of ‘99 crop with LDP taken 77Soybeans, % with LDP taken 88Wheat, % (1999) with LDP taken 83
2000 crop through Jan. 18, 01: U.S. corn 69 soybeans 77Wheat through 6/7/01: 79
2004 Corn 692004 Soybeans 40
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2000’s
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Relative Shares of Major Uses of U.S. Corn in 2004-05
Feed & ResidualExports
Food, Industrial & Seed
Relative Shares of Major Uses of U.S. Corn in 2000-01
Feed & ResidualExports
Food, Industrial & Seed
Impact on Elasticityof Demand?
Processing to be 32% of demand vs.
16% exported
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?
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Three Grain Price Forecasting Methods
1. Carryover percent of total use2. Computer forecasting model3. Price flexibility based on
elasticity of demand
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Forecasting Model Result160.2 bu./A. U.S. corn yield
11/12/04 Coefficients:• Exports/Supply .15 x 1.46• Stocks/use .16 x -0.76 • 0/1 Weather variable 0 x 0.22• Loan rate $1.95 x .27 • Prev. Price 2.42 x 0.10• Wheat Price 3.35 x 0.40• Forecast 2004-05 U.S. avg. corn price $2.36
Freedom-to-farm adjust. = $2.02 (-0.145%)
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Forecasting Model ResultExports -10% vs. prev. year, wheat price
$3.15/bu. Coefficients:• Exports/Supply 13% x 1.46• Stocks/use 18 x -0.76 • 0/1 Weather variable 0 x 0.22• Loan rate $1.95 x .27 • Prev. Price 2.42 x 0.10• Wheat Price 3.15 x 0.40• Forecast 2004-05 U.S. avg. corn price $2.24
Freedom-to-farm adjust. = $1.91 (-0.145%)
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Forecasting with price flexibilities
• Percent change in ’04-05 supply vs. Y/A• Adjustment for demand growth
–Feed use–Processing–Exports
• Forecast: Price flexibility x adjusted supply change x previous year’s price
• Adjustment for unusual developments, LDP
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Forecasting with corn price flexibility (Price Elasticity -.5)
• ’04-05 corn supply + 14.2% or +1,589 mil. bu.• Adjustment for demand growth
– Feed use +175 mil. bu.– Processing +260 mil. bu.– Exports +0
• Adjusted supply chg. +1,154 mil. Bu. or +10.3%• Forecast:10.3% x 2 = -20.6% negative price impact• Price forecast: $2.42 x .794 = $1.92 U.S.
avg./bu.• Forecast with -10% exports: $1.84/bu.
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PROBABILITY DISTRIBUTION OF FORECASTS
• Needed for marketing choices• Historical yield variability is a
guide• Soybeans this year with Asian
Rust??
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FORECASTS OF MONTHLYFORECASTS OF MONTHLYCROP PRICESCROP PRICES
• First concentrate on season averageprice, U.S.
• U.S. average typically above Iowa byrelative constant amount
• Season average price adjusted tomonthly via historical monthly pattern
Two patterns: normalcrop and short crop
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Price gain, Oct.-Jan. normal crops +5.2%Price gain, Oct..-Jan short crops +13%Price gain, Jan.-May normal crops +7.7%Price gain, Jan.-May short crops +3.2%
1978-9 to 2002-03
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SOYBEANS SHORT-CROP YEARSYear % Chg. In Use % Chg. In Price
1980-81 -11 +20 1983-84 -14 +381988-89 -17 +35 1993-94 -10 +15 1995-96 -3 +23 2002-03 -4 +262003-04 -11 +33
Avg. all years -10 +27 Avg. ’93-’02 -7 +24
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SOURCES OF SUPPLYSOURCES OF SUPPLYINFORMATIONINFORMATION
• Farmer surveys & aerial photos – forstocks & production
• Census reports (Exports, Mill stocks)• Checks from processing & exports
(wheat & soybeans)(production + stocks + imports –utilization = ending stocks)
4. Objective yield plots & surveys
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OTHER SOURCES OF DATAOTHER SOURCES OF DATA
•Monthly USDA crop forecasts•Weekly crop & weather bulletin•Census exports & processing reports•National Oilseed Processors Association•Private crop forecasts•USDA World S-D Reports•USDA Weekly Export Inspections•Weekly price support activity
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Forecasting U.S. Corn Yields
• Yield: The biggest uncertainty in the Supply-Demand equation
• Corn Yield:10% below trend for 2005 would cut production 1.2 bil. Bu. below expected use
• 10% above trend would put crop 1.07 bil. bu. Above expected use
• Price implications: Large
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Wisner Corn yield forecasting model, Key variables
• Weekly crop % good-to-excellent, major states
• Percent of the crop planted, major states—by 3rd week of May
• Weather variable: 0-1• Time trend to reflect new technology• Best results: late July & August
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Figure 1. USDA Corn Yield Forecasts, Percent Change from October to Season Final Estimate
-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
Avg.
Avg. All Years, +0.7%
* * *
* *
*
* Major weather stress years
Avg. Change, All Years except major weather-stress years: +2.1%
*
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Years Since 1965 With => +10% of Trend Yield
• 10 years out of 39 (26% of time)• All except one increased, Oct. to Season
Final• Avg. increase: 2.6%• Impact 2004 from +2.6% = 302 mil. Bu.• Would push total production to 11.91 bil.
Bu.• Largest & smallest impacts: 11.8-12.3 bil.
Bu.
Corn
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Figure 2. USDA Soybean Yield Forecasts, Percent Change October to Season Final,
1965-2003
-6%-4%-2%0%2%4%6%8%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Avg. = +0.7%
Avg. Change, All Years except major weather-stress years: +0.88%
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Years Since 1965 With => +7% of Trend Yield
• 5 years out of 39 (13% of time)• 4 increased, Oct. to Season Final, 1 was
unchanged• Avg. increase: 1.96%• Impact 2004 from +1.96% = 61 mil. Bu.• Would push total production to 3.17 bil. Bu.• Largest & smallest impacts: 3.10-3.22 bil.
Bu.
Soybeans
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FORECASTING FEED USEFORECASTING FEED USEOF CORNOF CORN
Key Variables:• Grain-consuming animal numbers• Availability of substitutes
U.S. feed wheatGrain sorghumBarley
Corn qualityLivestock marketing weightsLivestock/crop price ratioTime trend (incl. New technologies)
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Wheat crop % change vs. 03-04
Feed grain crop% chg. vs. 03-04
EU +27 +22Other Europe N.A. +58Canada +10 +1Former Sov. Reps. +39 +13China +4 +9Argentina +19 +26Brazil -6 0Australia -14 -15India +11 N.A.Mexico N.A. -6
World +12.3 +9.5
N.A. = not available
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Corn Export Sales1/13/05
• Japan -9%• Africa -6% • Taiwan -23% • Other Asia -21%• W. Hemisphere +4% • Unknown -37%
Total -10%Chg. Vs. ’95 -39%Chg. Vs. ’96 -10% Needed winter sales: 1.1-1.2 mil. Tons/wk.
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Global Corn Competitors
• Canada• European Community• Eastern Europe• Argentina• Australia• China • Brazil • India (sometimes)• Ukraine, other FSU
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Other competitors: Feed wheat, barley
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http://www.fas.usda.gov/pecad/
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China Crop Conditions
Source: Bridge News, Global Weather Service6/06/01
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What to Look For in Sources of What to Look For in Sources of Outlook InformationOutlook Information
• Good detail on international conditions• Use of probabilities• Up-to-date• Advisable to use several sources +
USDA• Technical analysis can supplement
fundamental analysis• Keys for 2001-02: U.S. crops & China
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Wisner Web Site:
http://www.econ.iastate.edu/faculty/wisner/
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Sources of Outlook InformationSources of Outlook Information http://www.tfc-charts.w2d.com/custom_menu.php3 http://ffas.usda.gov/ http://usda.mannlib.cornell.edu/ http://www.usda.gov/nass/sso-rpts.htm http://www.farmdoc.uiuc.edu/marketing/index.html http://www.econ.iastate.edu/faculty/wisner/ http://www.agecon.ksu.edu/risk/ http://www.msu.edu/user/hilker/ http://pacific.commerce.ubc.ca/xr/data.html http://www.ag.ndsu.nodak.edu/cow/./ http://www.agric.gov.ab.ca/index.html http://www.cbot.com/mplex.htm
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Soybean Market Analysis & Outlook
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Cash prices, low $4.00s to upper $3.00s
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Asian Rust
• Greatest Area of Risk: 12 mil. A. in South• Can be controlled by spraying• Most vulnerable time: flowering• Risk affected by no. of rains• Great Plains lower risk• An insurable risk• Plant all corn? Look first at markets
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Corn/corn: Harvest hedge price $2.02Less variable prod’n costs
@ 155 bu./A. (ISU farms avg. diff.) 1.70Net/bu. 0.32
Net/A. $49.60Corn/soy: Harvest hedge price $4.98Less variable prod’n costs @ 44 bu./A. & $21/A. spraying 3.14Net/bu. 1.84Net/A. (excludes aphid spraying cost) $80.962nd yr. corn yield no more than 2.5% below 1st year
matches returns to soybeans if you spray onceSpray twice: can match sb with corn yld. -8.5% vs c/s
1/25/05
Asian Rust: More Corn?
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Other Soy/Corn Shift Considerations
• Shorter plant/harvest window• Labor requirements• Storage/handling/drying needs• Tillage?• More N for corn• Will Southern Acreage/yield drop boost prices to
cover extra spraying cost?• More corn Acres: impact on corn price?• Adequate spray equipment?• Timeliness of spraying
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Soybean Export Sales1/13/05 vs. yr. ago
• China +8% • Africa +130% (+10.9mil.bu.)• EU +13%• Japan -25% • Taiwan -38% • Other Asia -17% • W. Hemisphere -21% • Unknown +40%Total +1% Vs. 2001: +1%SBM +7%; SBO +82%
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Forecasting Soybean Price• Supply up 621 million bushels vs. yr.
ago• Use up 304 mil. Bu.• Net: +317 mil. Bu. Or 12%• 2.5 x 12% = -30% on price• Indicated 04-05 price = $5.16• LDP impact could take price $0.70 to • $1.00 lower, except for Asian rust
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Key Points• Low but not zero risk storing corn into
spring• Old-crop corn contracting: low risk• Soybeans: scale up marketing• Manage LDPs carefully• Look for spring 2005-crop pricing
opportunities—especially on corn• Watch weekly export sales reports: corn
needs to be 1.1-1.2 mil. tons/week• SB export sales: 0.8-1.0 mil. Tons/wk.
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Other competitors: Feed wheat, barley
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Chinese Grain Storage150-180 mil. Bu.?
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Ethanol: Rapid expansion with major implications for agriculture
• 73 plants nationally in planning and/or construction phase
• At 20 mil. Bu./yr., adds 1.46 billion potential new processor demand
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Sac
Linn
Lee
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Tamama
Clay Kossuth
Jasper
Lyon
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Storyr Jones
Fayette
Adair
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Wapello
Pocahontas
Osceola
Jefferson
Audubon
Washington
BuenaVista
BlackHawk
Appanoose
CerroGordo
VanBuren
Mucatine
Dickinson
DesMoines
Winnebago
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Iowa Corn Processing & Ethanol Plant Locations, Actual & Planned, 12/17/04
PoweshiekPolk
Boone
GreeneCarrollCrawford
Plymouth
O’Brien
Woodbury
Monona
Harrison Shelby
Wright Franklin
Floyd Chickasaw
Webster Hardin
Louisa
Emmet
Palo Alto
Hancock
Worth Mitchell HowardWinneshiek Allamakee
BremerButler
Hamilton
GrundyBuchanan
Delaware
Dubuque
Jackson
Clintonn
Guthrie Dallas
Johnson
Marshall
Pottawattamie
Mills
Fremont
Madison
Warren Marion Mahaska
Keokuk
Adams Union Clarke Lucas Monroe
Taylor Ringgold
Cherokee
Calhoun
Decatur Wayne Davis
Henry
Scott
Humboldt
Clayton
Cedar
Sioux
Cass
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Est. Corn Available for Export, 2003 and Proj. 2008, Mil. Bu.
Proj. Proj. ’03 ’08 I ’08 II 115 10 -19
Proj. Proj. ’03 ’08 I ’08 II167 123 105
Proj. Proj. ’03 ’08 I ’08 II254 138 112
Proj. Proj. ’03 ’08 I ’08 II207 114 91 Proj. Proj.
’03 ’08 I ’08 II178 155 147
Proj. Proj. ’03 ’08 I ’08 II- 248 -296 -343
Proj. Proj. ’03 ’08 I ’08 II102 106 106 Proj. Proj.
’03 ’08 I ’08 II51 55 55
Proj. Proj. ’03 ’08 I ’08 II-24 -35 -49
Iowa Proj. Proj. ’03 ’08 I ’08 II803 370 205 Key Assumption: Corn acres @ 2004 level
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16% Above Trend
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Needed IA Crop Acreage Adjustments to Maintain 2003 Corn Export Availability
• Alternative I: Plants– Operate at Rated Cap.– Corn Acres + 16%– SB Acres -19%
• Alternative II: Plants– Operate at 120% of Rated Cap. – Corn Acres + 23%– SB Acres -28%
• Corn/Soy mil. acres 2008 in Iowa: – 14.2/8.2 & 15/7.4 2004: 12.4 corn, 10.2 SB)
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U.S. Acreage Implications• Potential added processing demand:1.44 bil.
Bu. • DGS demand offset: 260 mil. Bu.• Current U.S. corn demand: 10.65 bil. Bu.• Potential demand: 12.0 bil. Bu.• Current corn acres: 73.3 mil. Acres• Trend yield production (2005): 10.6 bil. Bu.• Needed extra acres: 7 to 10 million
--More if China becomes corn importer
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Questions for Corn Use• Tight supplies--which users can out-bid others? • What happens with occasional low U.S. yields?
-- 1980, 1983, 1988, 1993, 1995, 2002 • U.S. production shift, beans to corn? • Bring back part of 34 million CRP acres?• Impact on land values & Ag structure?• Impact on exporting firms & basis?• More investments such as Bunge & Cargill’s
Caribbean ethanol dehydration plants?
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Questions for Corn Users• Basis impacts, merchandising margins? • Intensified competition in grain acquisition• Changing role of train-load shippers• Need for sharply increased storage space, drying
capacity with more corn• Impact on crop input demand?• Livestock industry: higher corn prices, possibly
lower protein cost for dairy, maybe hogs.• How does bio-diesel fit in? • Most ethanol plants below optimum size for
shipping DGS by train
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Rotation Considerations• Corn/soybean rotation spreads labor
needs• Soybeans provide nitrogen• Second yr. corn has lower yield than
first yr.• Implications for corn: disease build-
up?• Asian rust, nematodes, SB diseases
pushing bean acres to corn
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...and justice for allThe U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability,political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Manymaterials can be made available in alternative formats for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call 202-720-5964.
Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Stanley R. Johnson, director, Cooperative Extension Service, Iowa State University of Science and Technology, Ames, Iowa.