April 11, 2011

Record CBOT corn prices causing demand to rise

US farmers are expecting to plant 92.2 million acres of corn in 2011, the second-largest acreage since 1944, after CBOT corn hit a record US$7.7325 a bushel this week, more than double from a year ago, driven by soaring demand for corn for use as animal feed and in ethanol production.

Normally, higher corn plantings in the US, the world's largest corn producer, would dampen prices. And higher corn prices would dampen demand. But so far there is little evidence of either. Instead, CBOT corn stocks have fallen 15% year-on-year, leaving them equal to around 5% of annual demand - enough to cover 18 days of US consumption. Two years ago, stockpiles topped 13% of annual demand.

Prices will have to rise much higher before demand starts to fall. With meat prices also high, livestock farmers may only lower demand or seek feed substitutes like wheat when corn prices reach US$8.60 per bushel. Oil prices are rising faster than corn, so ethanol producers, which consume 40% of corn output, are unlikely to cut demand, particularly as gasoline blenders receive a tax credit of US$0.45 per gallon for gasoline containing ethanol. Corn prices will need to rise above US$10 per bushel before ethanol production costs rise above gasoline prices.

Meanwhile, supply constraints could re-emerge. The Department of Agriculture forecasts corn yields this year at 160 bushels per acre, up from 153 last year, but that assumes good growing conditions. Even then, the stocks-to-demand ratio, according to Rabobank, would only improve to 6.9%, still the lowest since 1995-96. Fallow land is scarce; planned increased corn acreage comes at the expense of crops like soybeans, where prices are also rising.

What might help prices lower? A reassessment of the market-distorting ethanol subsidy seems unlikely given the US desire to increase ethanol's role in the energy mix. Sharply lower oil prices would help, as would a long, hot summer that boosts yields.