Waning demand pressures corn prices

by Ron Sterk
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KANSAS CITY — The 2009 outlook for corn includes a weak demand picture, a great amount of uncertainty about supply and a much different scenario from a year ago when prices were advancing amid tight stocks and a weak dollar that made it a bargain to foreign buyers.

"Next year will be nearly opposite 2008 with highs later in the year," said Dan Basse, market research manager for Ag Resource Consulting Group, Chicago. He expects corn prices will average $4.20 a bu next year, but with a peak after fall harvest rather than in the first half of the year as in 2008.

Nearby corn futures prices at the Chicago Board of Trade closed at a record high $7.54½ a bu on June 27, only to drop more than 60% to a recentlow of $2.93½ on Dec. 5. Prices have since strengthened to near $4 a bu, but still were down about 50% from the June high and were about 10% below year-ago values.

As has been the story in recent years, corn prices will be volatile, with moves of $2@3 a bu "easy," Mr. Basse said.

In its Dec. 11 World Agricultural Supply and Demand Estimates (WASDE), the U.S. Department of Agriculture projected corn prices to average in a range of $3.65@4.35 a bu in 2008-09 (September-August), down from $4@4.80 forecast in November and compared with $4.20 in 2007-08.

The U.S.D.A. trimmed its projection of total corn use by 350 million bus, or 3%, from its November number and by 588 million bus, or 5%, from 2007-08.

Sharply lower gasoline prices and financial problems in the ethanol industry are expected to reduce the amount of corn used to make ethanol in 2008-09. The U.S.D.A. cut its projected use of corn for the fuel by 300 million bus, or 7.5% from November. At 3,700 million bus, corn use for ethanol would be up 674 million bus, or 22%, from 2007-08, but the increase pales in comparison with that of 907 million bus, or 43%, from 2006-07.

Paul Meyers, vice-president of commodity analysis for Connell Purchasing Services, Berkeley Heights, N.J., said he thought the U.S.D.A. cut projected use of corn for ethanol too much because "we still have the mandates" requiring a minimum level of use and the Obama administration appears favorable to the fuel.

"Problems in the ethanol industry were more about management than the economics of ethanol," Mr. Basse added.

Feed use of corn in 2008-09 was projected by the U.S.D.A. at 5,350 million bus, down 10% from the previous year due to reduced production of red meat and poultry, although the number was boosted by 50 million bus from November to offset decreased supply of distillers grains, a byproduct of ethanol production.

Export demand for U.S. corn is suffering from a stronger U.S. dollar, more plentiful supplies of competing grains, including feed wheat, and global economic uncertainty. The U.S.D.A. cut its projection of U.S. corn exports by 100 million bus from November in its December WASDE report. At 1,800 million bus, 2008-09 corn exports were expected to be down 26% from 2007-08. Export sales commitments of U.S. corn through the first 15 weeks of the marketing year (since Sept. 1) were 46% below the same period a year ago, the U.S.D.A. said.

Lower freight costs remain a big positive for corn and other bulk commodity shippers. Domestically, railroads reduced fuel surcharges on Dec. 1 to reflect sharply lower diesel fuel prices from earlier in the year. And ocean freight rates plummeted in 2008 to 21-year lows as the result of lower fuel costs and reduced shipping demand.

While there is general agreement that demand for corn will be lower in 2009, much uncertainty about supply persists as Northern Hemisphere farmers have yet to make final 2009 planting decisions.

Mr. Basse said Ag Resource surveys have shown for some time that farmers intend to plant about 82.3 million acres of corn in 2009, down about 4% from 85.9 million acres this year. High production costs for corn "makes the farm community very anxious," he said. Instead, he expects farmers will favor soybeans, which cost about half as much as corn to grow.

Memphis, Tenn.-based analytical firm Informa Economics also recently projected 2009 plantings near 82.3 million acres. Informa forecast soybean plantings up 7% from 2008 at 81.5 million acres.

But Mr. Meyers said he expects corn plantings closer to 88 million acres as crude oil prices stabilize around $50 a barrel, fertilizer costs decline because of recent crude oil price declines, domestic demand for feed and ethanol grows and global demand improves, resulting in a corn-soybean price ratio that will "buy back" corn acres.

Much of what happens with corn demand and supply will depend on the length and severity of the U.S. and global recession, with analysts’ ideas of improvement in economic conditions ranging from mid-2009 to early 2010.

This article can also be found in the digital edition of Food Business News, December 9, 2008, starting on Page 1. Click here to search that archive.

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