November 15, 2010
How could the price of new-crop corn futures rebound from a low of $3.50 at the end of June to $4.40 at the end of August, and spike to $5.80/bu. by mid-October? Surely there must have been a terrible crop disaster!
U.S. corn yields are expected to be about 4% below trend-line expectations. Far from a disaster, 2010 will go down in history as a modestly disappointing year for corn yields. This was not a short crop. Among analysts, the unofficial definition of a short crop is one with grain yields averaging 10% or less below trend-line yields (unofficial because there is no official definition of a trend-line yield). Think of 1983, 1988, 1993 or 1995 – it’s been a long time since we last endured a true short crop in corn.
What does it say about the current balance of supply and demand when a corn crop with the third highest yield ever recorded would set-off a 65% increase in corn prices? We are at a tipping point.
Ending stocks are estimated by the USDA each month and measure just what the term implies – the amount of grain left over at the end of a crop year. Ending stocks for 2010 are projected at 900 million bushels. That sounds like a big pile of corn, but corn demand is also great. The industry uses more than 250 million bushels each week. U.S. ending stocks of corn, relative to use, are projected to be less than 7% – only 1995-1996 was tighter.
A modestly disappointing crop has us at the tipping point. It all makes me wonder where prices would be if we had a real short crop.
The other side of the equation
A balance sheet has two sides. Modestly disappointing yields only speak the supply side of the ledger. What’s happening with corn demand?
Corn demand is segmented into three categories; exports, feed demand to support livestock, dairy and poultry industries, and “food, industrial and seed.” This final catchall category can be further segmented into corn used for ethanol production and everything else.
The accompanying table looks at the change in demand for each of these segments over the past decade. Exports are projected at 2 billion bushels, virtually unchanged from last year. This figure (plus or minus 10%) describes all but two of the last 10 years. Not much happening here.
Feed demand for corn peaked at over 6 billion bushels in 2004 and 2005 but the trend since has been lower. You must have your head in the sand if you not aware of the challenging environment in hogs and dairy.
Food, industrial and seed – not including ethanol – is the smallest piece of corn demand. Most of this is used to produce corn sugar (and please don’t call it high fructose). Demand is basically flat.
Ethanol demand – now here’s a change. Usage is up nearly 600% in 10 years. Many of us are under the impression that the boom went bust two years ago. Think again. It may not be as profitable as it once was, but corn used for ethanol production in 2010 is projected to be a billion bushels higher than 2008.
I try to avoid bold predictions but, if prices remain high, actual feed and ethanol demand will be smaller than the latest projections. Five-dollar corn has a way of shrinking demand.
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