February 26, 2007

Corn prices may push further due to ethanol trend

Crop analysts at A.G. Edwards issued a report in January speculating on the prospect of US $5-per-bushel corn which was seen to be outlandish as corn often moves at a slug's pace in the market, only crossed US$4 threshold around the time the report was published.

But US$5 corn doesn't look like a reach anymore as the market continues to be dominated by ethanol demand. Corn futures at the Chicago Board of Trade last week hit a 10-year high, topping US$4.47 a bushel, before retreating just a bit by Friday on suspicions that foreign buyers were cutting back because of the high prices. The CBOT's March corn contract closed Friday at $4.30OE.

AG Edwards believes ethanol and extremely tight inventories of corn, which can be used in its processing, will continue to support the futures prices. There will be bumps along the way, with the ethanol industry falling victim to its own expansion and having to work on thinner margins. But the brokerage's analysts see production capacity still doubling within the next two years to about 12 billion gallons.

The Agriculture Department has forecast that corn use for ethanol will be up 34 percent once the tallies for the 2006 crop are complete. It expects the use to grow another 46 percent in 2007. Farmers are responding by switching acreage to corn from soybeans, and production should hit a record, barring a weather calamity.

A.G. Edwards estimated this year's harvest could be greater than 12 billion bushels. But it said the ethanol factor means even that all-time high would just cover the demand, leaving corn stocks still tight. The report noted although US corn crop in 2006 was the second-highest yielding on record and the third-largest in overall volume, it was still less than 90 percent of anticipated use.

The situation also affects soybeans, where world demand is acute. A.G. Edwards' Bill Nelson said soybean production will migrate to South America, which already tops the United States in production of the crop. He also sees rising prices for cotton, wheat and rice.