Posted by: usset001 | October 13, 2010

Making sense of $5 (plus) corn

This has been quite a move in the corn market, and one that deserves comment. Dec’10 corn futures, trading under $3.50 per bushel at the end of June, are now close to $5.75 per bushel – a 64% increase in price in just over three months. It started with upheaval in the wheat market, which put an end to an overwhelming bearish tone. Dec’10 corn found a way to rally 50 cents in July and another 40 cents in August. But that was just the start – the growing realization that this corn crop was not going to be another record setter put another $1.35 on the price since early September.

A few nuggets for your consideration…

Based on the October WASDE report, the ending stocks/use ratio in corn is projected at 6.7%, the tightest carryout since the 1995/96 crop year. This is less than half of the average carryout in U.S. corn over the past decade. Another way to look at this figure is that the U.S. will have 3.5 weeks of corn on hand when the crop year ends at the end of August. That is a small figure – keep in mind that you cannot run a feeding operation or an ethanol plant or an export elevator with no stocks on hand. Your normal feeding operation and ethanol plant will want at least one week of usage on hand.

Will there be rationing of demand? High prices have a way of doing that. In May of 2008, USDA (through the WASDE report) published its first estimate of ethanol demand for corn during the 2008/2009 crop year. Their initial projection was 4.0 billion bushels. To refresh your memory, May of 2008 was ground zero for the most recent run-up in corn prices – the environment for profitability in ethanol was not good. The ethanol industry ended up using 3.7 billion bushels in the 2008/2009 crop year. The May 2009 WASDE report projected ethanol usage of corn at 4.1 billion bushels in 2009/2010 – the October report placed the actual usage at 4.56 billion bushels. The last two years show that ethanol demand can swing + or – 10%, depending on the environment. FYI, the current projection for ethanol usage of corn in the current crop year is 4.7 billion bushels.

As tight as the carryout situation is in corn, it is not that bad in soybeans or, surprisingly, wheat. In soybeans, an ending stocks/use ratio of 8% is in-line with the average of the last 10 years. We’ve seen tighter situations in 6 of the last 10 years. In wheat, U.S. stocks will be down from last year – but we ended the most recent crop year with the highest ending stocks/use ratio since 1986. Ending stocks at the end of this crop year will be the second highest in the last decade. The difference in wheat must be viewed with a world perspective, where stocks are in-line with levels we’ve grown accustom to in the last decade.

The story line for wheat and soybeans is exports, and they are running fast and furious.

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