As the drought of 2012 continues to widen and become more severe in the U.S. Corn Belt, December corn futures have rallied roughly from $5.06 on June 15 to as high as $6.50 the last week of June.

The obvious answer as to whether you should sell or hold corn you have stored depends on weather, especially in the next two weeks. If widespread rains arrive to rescue the crop, corn prices will retreat. If the current drought gets worse, corn has additional upside price potential--until some users cry "uncle" and reduce their buying. We already know who these corn users will be.

Rising corn price prompts ethanol maker to shutter plants

Sell Or Hold Your Old Crop Corn?

Rising corn prices and slumping gasoline prices are putting a real squeeze on ethanol margins. Last week (on June 21) Valero announced it is temporarily shutting down its ethanol plant at Albion, Nebraska. This week (on June 26) Valero announced it is also suspending production at a second ethanol plant, the one it owns in Linden, Indiana.

"It is not profitable to run an ethanol plant when the margins are negative. However, we expect market conditions to improve to the point that we can restart ethanol production at the plants before the fall harvest," says Valero spokesman Bill Day.

A combination of rising corn prices in the face of Midwest drought increases the cost of producing ethanol. At the same time, lower prices for gasoline are being driven by lower oil prices, are behind Valero's decision. Valero, a large oil refiner based in Houston, Texas, owns 10 ethanol plants in the U.S.

Livestock squeeze also may result in reduced corn use

Livestock producers are huge corn users. They may be the next sector to trim corn use. Unfortunately, animals that are in mid-production cycle aren't very marketable. For example, how do you recover value from 1,000 head of 125-pound market hogs? They're not feeder pigs and they are certainly not ready for slaughter.

Dairy producers may be in the tightest financial squeeze. They face slumping milk prices, rising grain and concentrate costs and tight supplies of increasingly pricy forage. High prices for 90% lean beef trimmings and cull cows may entice some dairy farmers to cull herds and more closely trim their feed needs.

Do not overstay the market; short crops have long tails

Short crops have long tails—so goes the old saying. The drivers are simple in this kind of a market. Short crops run up corn prices. High prices squeeze some users out of the market. At the same time, high crop prices entice more crop production in the next cycle. The result is increasing supplies of grain; and some buyers are scared away. Such a situation will shift the supply-demand balance from squeaky-tight to burdensome. Prices retreat.

In such a situation, the long tail comes from prices typically peaking at or near the harvesting of the short crop.

If you don't believe a significant corn price collapse is possible in Iowa, ask a cotton grower. Cotton futures were knocking on the $2 a pound level less than two years ago. This week the December 2012 cotton futures price contract struggled to rally back to 68 cents a pound.

Watch for next U.S. Weather Service forecast--first week of July

Summing up: An updated 30-day weather forecast from the National Weather Service will be released soon--sometime between July 5 to July 10. That's a very important bit of information to watch for.

Also, the El Nino Watch is underway. According to the June 7 forecast, which is the latest forecast from the U.S. government's National Weather Service Climate Prediction Center, there is a 50% chance that El Nino conditions will develop during the second half of 2012.

The U.S. tends to have improved chances of getting above trend-line national corn yields, during El Nino-year summers. Example: The years include both 2004 (U.S. ended up with a 160.3 bushels per acre national average) and 2009 (U.S. finished with a 164 bushels per acre national average). Those are the highest U.S. average yields in history.

Watch closely the next forecast regarding El Nino's likely status. The forecast will be made by Dr. Klaus Wolter, research associate with NOAA. Approximately July 10 Wolter will make the forecast under the link Multivariate ENSO Index or MEI. Or contact him at www.esrl.noa.gov/psd/people/klaus.wolter.