Corn has done it again. Back in 2010, analysts predicted CBOT corn would not go above US$4.50 for four to five years. Instead, it broke the US$5.00/bushel barrier within a few months.

Despite widespread predictions of US$4/bushel corn several months ago, profitability is flowing from livestock to feed crops, as corn flirts with the US$5/bushel level. Early April brought news that the previous week's corn export volume of 1.33 million tonnes came in far above expectations. It is a sign that despite East Asia's growing economic weakness, Ukraine's corn may not be reaching market, making for more US exports and a higher price level.

 

US feed demand also appears poised to come in above expectations. The USDA's quarterly hogs report saw their numbers fall by 2.9% from a year ago -hardly a bullish number but considerably less than what was expected, given the expected mortality rates from the PEDv outbreak.

Finally, although the levelling off of US ethanol production reduced its long-term sway over corn prices, supply chain issues can still exercise a short-term impact. Such is the case at this time: American petrol consumption is near its yearly low but ethanol production needs to be ramped up; not just for May's start of the peak driving season but also to replenish unusually low ethanol inventories. This could cause America's feed mills and livestock farms to compete for corn just as meat production takes its cyclical, second quarter upturn.

All this is putting pressure on the USDA to boost its upcoming April WASDE report's estimates for corn exports and ethanol output -at the expense of inventories, which seem to be headed for a closing level near 35 million tonnes, and the stocks-to-use ratio near the critical 10% level. That is a far cry from the 50 million+ tonne closing inventory estimates and 15%+ stocks-to-use ratio that had tanked corn into the US$4.20/bushel range at the turn of the year.

Beyond the crucial closing inventory question, the question of planted acreage is also starting to light a fire under the market. The USDA currently expects corn planted acreage of 91.7 million acres, down 3.9% from last year and its lowest level since 2010. Assuming the 3.9% in planted acreage is partly offset by a 2% improvement in corn yields, that still leaves 2014-15's crop 7 million tonnes smaller this marketing year's harvest.

US corn inventories are already 15 million tonnes or 30% lower than they were expected to be six months ago. Remove from the equation a few million tonnes of lost Ukrainian crop exports, additional corn being lost to unexpectedly high ethanol and feed demand -and the world market suddenly has some 25 million tonnes less corn than it did a few months ago.

Of course, beyond the 15 million tonnes of US corn that was expected to be there but isn't, the rest of that figure is subject to considerable uncertainty. The Ukraine crisis is still being played out, price swings or the weather could move planting intentions 5% one way or the other. Rallies and bear markets trends begin with shocking, unchangeable certainties and this is not the case at this time.

Nonetheless, that sunny supply-side forecast of six months ago is starting to fill up with clouds that look increasingly dark. Nobody knows if a supply-side squeeze is in the offing, but mounting supply-side uncertainty is what has pushed corn close to the US$5/bushel level -and will keep it there, unless there is a considerable change in expectations.