High corn prices generating scant impact on record demand

by Ron Sterk
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A 2007 movie titled “King Corn” sought to blame corn for many of the country’s ills at the time. While the film’s opinion about the largest U.S. crop was jaded, it got the “king” part right. Corn has been for some time and likely will remain in the “driver’s seat” among major commodities. With demand at an all time high and old crop stocks near historical lows, the 2011 corn crop will certainly have an impact on the size and value of other crops, and the market is almost assured of volatility. Despite recent record high corn futures prices, demand appears as strong as ever.

“Old crop corn prices declined sharply in the first half of March as it appeared high prices had sufficiently slowed the rate of consumption,” said Chris Hurt, agricultural extension coordinator at Purdue University in his latest Weekly Outlook. “However, a continued high rate of ethanol production, a resurgence of export sales and larger livestock inventories provided evidence that consumption had not slowed.”

In its April 8 World Agricultural Supply and Demand Estimates the U.S. Department of Agriculture projected Sept. 1, 2011, U.S. corn carryover at a 15-year low of 675 million bus, or about 18 days of use, based on total 2010-11 U.S. supply of 14,175 million bus, down 4% from 2009-10, and total use at 13,500 million bus, up 3% from last year. The stocks-to-use ratio of 5%, the lowest since 1995-96, raised more than a few eyebrows. Projected 2010-11 (marketing year ending Aug. 31, 2011) total corn use was record high, 12% above the latest five-year average use of 12,067 million bus and above any prior year’s corn production.

The increase mainly may be attributed to the food, seed and industrial segment of the demand equation. Projected at 6,400 million bus in 2010-11, food, seed and industrial use was a whopping 46% above the most recent five-year average of 4,371 million bus, up 8% from last year and more than double the 2005-06 amount of 2,999 million bus.

In contrast, feed and residual, the second major use component and until 2009-10 the largest segment of demand, was projected at 5,150 million bus in 2010-11, down 1% from a year earlier and 7% below the five-year average. U.S. exports, estimated at 1,950 million bus in 2010-11, slipped 2% from 2009-10 and also were 7% under their five-year average.

The sharp rise in food, seed and industrial use was almost completely the result of soaring demand for corn to make ethanol, which was projected at a record 5,000 million bus for 2010-11, equal to 40% of the 2010 U.S. corn crop, up 9% from last year and three times the amount used in 2005-06. The food and seed segment, projected at 1,400 million bus, was up 2% from 2009-10 and was 3% above its five-year average.

“Our estimate is that $7.40 cash corn does not cause ethanol producers to shut down,” Mr. Hurt said. “Prospects for even higher gasoline prices will mean they can perhaps continue bidding up to the lower $8 (a bu) area.”

The U.S.D.A. lowered its feed and residual estimate in April by 50 million bus from March based on “increased prospects for 2011 soft red winter wheat production and higher year-to-year corn plantings in the South,” which would be available in the second half of 2011 and limit old crop corn demand.

“A significant decline in the rate of (corn) use is required to limit consumption to the U.S.D.A. projection,” Mr. Hurt said, suggesting the U.S.D.A.’s estimated feed and residual use of 5,150 million bus may be on the low side. “Our estimates suggest the animals industries can pay up to $8 for corn before losses set in,” he said.

“My general impression is that usage will still need to be reduced and that it will take higher prices than the record $7.81 (April 7) on the July futures,” Mr. Hurt said. Futures prices climbed still higher, with the July 2011 contract hitting $7.88¾ a bu on April 11. Prices have since declined more than 40c a bu, with losses late last week attributed to improved forecasts for spring planting.

“While the pace of consumption of corn and soybeans will continue to be very important, the market also will be closely monitoring prospects for longer-term commodity demand,” Mr. Hurt said. “Weakness in financial markets and concerns about the consumer impact of higher fuel and food prices raise concerns about the overall strength of commodity demand.”

He concluded, “The upcoming period of uncertainty about commodity demand, general economic prospects and 2011 production prospects provide an environment for very erratic price movements.”

At what price level old crop demand will be curtailed remains to be seen, but the trade last week seemed to shift its attention to planting of the 2011 crop.

The next key date for U.S.D.A. reports will be June 30, when the Grain Stocks report will provide an indication of corn stocks on June 1 disappearance in the March-May period, and the Acreage report will show how many acres of corn actually were planted this spring.

Weather delays shrink window for optimal corn planting

The market may use a record large corn crop in 2011 to boost 15-year low stocks numbers and meet record high demand requirements. But unlike last year’s nearly perfect planting, growing and harvesting seasons, the crop is getting off to a rocky start this year as cool, wet weather from the Upper Midwest across the Central states keeps farmers out of their fields.

Corn planting in the 18 major producing states was advancing slowly with only 7% completed as of April 17, up from 3% a week earlier but slightly below 8% as the 2006-10 average for the date and well behind 16% at the same time a year ago, the U.S. Department of Agriculture said in its April 18 Crop Progress report. The disparity between this year and last year, when good weather allowed exceptionally early field work, was wide in several key states, including four of the top five, with planting by April 17 in Iowa 2% completed (16% last year), Illinois 9% (29%), Minnesota none (11%) and Indiana 2% (15%). Only Nebraska at 3% planted was close to last year’s 4% because of a slow start a year ago.

Weekly crop bulletins from states across the Upper Midwest sounded a common theme of too wet and too cool.

“Field work continues to be delayed by wet field conditions with only 1.7 days suitable for field work the past seven days,” the South Dakota U.S.D.A. field office said in its April 18 crop update.

“Planting in most parts of North Dakota was pushed back again due to saturated fields and low soil temperatures,” the state’s U.S.D.A. field office said in its April 18 report. “The average starting date for fieldwork is expected to be May 5. This date is 17 days later than last year and 14 days behind the five-year average.”

“Cool, wet weather has slowed fieldwork for much of Iowa,” the state’s U.S.D.A. field office said, noting the week ended April 17 was the wettest in the past 23 weeks.

In its March 31 Prospective Plantings report, the U.S.D.A. indicated farmers planned to increase corn area from 2010 by 850,000 acres (19%) in South Dakota, by 500,000 acres (4%) in Iowa and by 450,000 acres (22%) in North Dakota.

The longer planting is delayed, the less likely the full amount of those increases will be realized. Overall, the U.S.D.A. in its March 31 Prospective Plantings report said farmers indicated they would plant 92.2 million acres of corn in 2011, up 5% from 2011 and the second most since 1944 after 93.5 million acres in 2007.

Fortunately, the summer weather outlook appears favorable, or at least neutral, at this point.

“If we can get it in the ground, the summer is looking pretty good,” said David Salmon, president of Weather Derivatives in Belton, Mo. “The models indicate the summer will be neither too hot nor too dry.” But he noted a summer that was too cool also may be detrimental, evidenced by a late harvest and high moisture levels of the 2009 crop.

Last Wednesday corn futures prices slumped about 13@21c a bu on forecasts more favorable for corn planting in early May, although cool and wet conditions were expected to continue through April.

Mr. Salmon noted planting wasn’t yet late enough to cause corn yield losses in Iowa or in most other top producing states across the Midwest, “but there is still a lot of drying out to do.” The forecasts look drier in early May, he said.

Until new U.S.D.A. data on plantings are released in the June 30 U.S.D.A. acreage report, the corn market will mostly be at the mercy of the weather, as it will be for the rest of the growing season.

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