As of late August, cash corn prices in many areas are above $8.50/bu. Demand is being cut in some areas, but not fast enough. The question on everyone’s mind is, “What price will it take to cut demand with yields so low?”

My guess is that the national average corn yield will land between 120 and 125 bu./acre. Carryover could drop to 300 million bushels or lower. But that is below pipeline supplies and thus it will not happen! Prices will climb high enough to assure that the carryover is at least 400 million bushels or higher.

Where will the cuts come from?

Only four possibilities could change significantly on the demand side:

1. Ethanol: We’ve already cut estimated corn usage for ethanol from 5 billion bushels to 4.6 billion. Will the government step in and lower the mandate? Personally, I doubt that in an election year. And even if it does happen, the impact on overall corn usage for ethanol won’t be hurt all that much. It takes a lot of money and time to change formulas that are already well set at blender stations. Changing the blend changes the octane. Some stations in states such as California will have it no matter what. This is not a line item that can be legislated away.

2. Corn-to-ethanol conversion rate: The government could, however, readjust the formula. Changing that line item in the formula would add 300 to 400 million bushels to the carryover, many industry people estimate. The corn-usage number is “reverse engineered” starting with ethanol, and then using a conversion rate of 2.7 gal./bu. to estimate how much corn was actually crushed. Many in the industry think that conversion rate is now between 2.85 to 2.9 gal./bu.

3. Export embargo: Exports have already dropped to nearly 1.5 billion bushels but need to drop more. Could we have an embargo? Doubtful in an election year, but always a possibility.

4. Livestock feed: My personal opinion is the pork industry was pretty well covered on corn needs going into this drought, and balance sheets had improved considerably since 2009, so I see little cutback in pork production. The dairy industry is different. Some dairies have not recovered financially from the disaster of 2008 and 2009. Those with weak balance sheets may be liquidated or at least cut back on their herd. The other question mark is the poultry industry. We’ll likely see some modest cutbacks there – depending on who covered their feed needs and who did not.

Record imports

A couple other line items that could help the balance sheet in corn include increased imports. We have already raised our estimates from 25 to 100 million bushels – the most in history. They could exceed 150 million bushels. Also consider how much feed wheat will be substituted for corn.

It’s too early to tell which of the above might happen and it will likely be a combination thereof. Count on the top being relatively soon in this market. Supply-side fundamentals are discounted in prices quickly, and the overall rationing process will expose itself two months after the top is in. Think back to 2008. When the market was peaking, many people in the industry were still pounding the drums that the market had to go higher because rationing wasn’t taking place. It was – we just didn’t know it.