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Tax Bill Shores Up Corn Demand Outlook



The demand side of the corn market has been shored up with the extension of federal supports for ethanol for another year as part of the tax bill signed into law by President Obama on Saturday.

The extension of the tax credits helped rekindle concerns about tight U.S. corn supplies in the futures market and push nearby March corn futures 22 ¼¢ higher last week.

The continuation of the lower income tax rates enacted by the George W. Bush administration also helps bolster the outlook for the general economy and corn demand.

The tax bill extends the “blender’s tax credit” for fuel refiners blending ethanol in their gasoline at the existing level of 45¢/gal. through the end of 2011 and also extends the U.S. tariff on ethanol imports at 54¢/gal.

The extension of the ethanol supports marks a remarkable change of political fortune for supporters of corn ethanol as only about 10 days earlier, it appeared both measures would be allowed to expire at the end of the year, leaving only usage mandate under the Federal Renewable Fuels Standard to support ethanol production.

With the “blender’s tax credit and the ethanol import tariff remaining in place, U.S. corn-for-ethanol usage appears to be on track to surpass USDA’s current 2010-2011 forecast of 4.8 billion bushels.

Weekly ethanol production figures from the U.S. Energy Information Agency (EIA) indicate corn-for-ethanol usage during the first quarter of the marketing year was on track to reach around 5 billion bushels for the marketing year as a whole.

Fuel ethanol output picked up further in early December.  Weekly production hit a new record high of 939,000 barrels/day during the week ended Dec. 3, up 4.9% from the previous record set the week ended Nov. 12, and came in at only slightly lower at 937,000 barrels/day the following week.

The continuation of the ethanol incentives was not well received by several other organizations. Many livestock, food and environmental groups slammed the action as ill advised and poorly timed given this year’s tight corn supplies.

The remainder of the corn demand picture is mixed. U.S. corn export sales have been remained sluggish in recent weeks, as have actual export shipments.

U.S. corn export sales commitments through Dec. 9 were still running 7.5% ahead of a year earlier, with USDA forecasting a 1.8% drop in marketing year exports, but actual corn export shipments were running 1.3% behind a year earlier.

Wheat crop quality problems in Australia have helped cloud U.S. corn export prospects as Australian feed wheat will compete with U.S. corn for business from Asian feed makers.

The prospect of a record corn crop in Argentina is also negative for U.S. corn exports, but that crop is still in doubt due to dry weather in some key Argentine growing areas.

There are no indications that corn feed usage has dropped off with the supply of cattle in U.S. feedlots as of Dec. 1 up 2.9% from  a year earlier at a three-year high and hog weights remaining near record levels.

However, feed usage is always difficult for the market to judge. The improved quality of this year’s corn crop has certainly boosted feed conversion this year along with milder weather across the Midwest and the main Plains cattle feedlot region.

Increased usage of distillers’ dry grains and solids (DDGS) may also be cutting into corn usage. DDGS prices are up significantly from last year, even though production has increased along with ethanol production.

According to USDA, DDGS prices at Illinois ethanol plants averaged $169.11/ton for the week ended Dec. 17, up 34.7% from $125.50 a year earlier.

The corn market will have to wait for the Quarterly Grain Stocks Report due out on Jan. 12 for its first good reading on 2010-2011 feed usage.

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