June 5, 2012

 

US corn's high prices may cause shortage this summer

 

 

Corn is selling at strangely high prices from Ohio to Kansas which signals that US will run short of corn this summer.

 

If it does run short, the impact could be felt worldwide. Sales to big export customers like Mexico, Japan, South Korea, and China could take a hit as America grows 40% of the corn sold on the world market.

 

Domestically, sky-high prices could have US millers suspending operations. If corn for feed costs too much than milk, egg and meat farmers could curtail production leading to higher food prices.

 

These continued high prices have also sharpened arguments by analysts that the government may not have a reliable picture of the shrinking stockpile. Some analysts say the Agriculture Department has over-estimated the supply, so that the situation is worse than it looks.

 

Their argument is built around the "basis," which is the difference between the local price for corn and the futures price in Chicago. A strong basis is a signal to growers to sell their corn now, especially with a record corn harvest expected in the fall. But, this year farmers are not selling.

 

Prices on the cash market, where processors and livestock feeders buy corn for use today, have been unusually high for months. They are well above Chicago futures prices and much higher than historically at this time.

 

"Either farmers aren't selling or the corn isn't there," said Glenn Hollander, co-owner of Hollander-Feuerhaken, a Chicago brokerage and cash merchant. Even with strong basis, it was difficult to buy corn for domestic use, he said in late May.

 

In central Illinois, the basis was US$0.53 a bushel above futures prices on Monday (June 4), half a dollar higher than a year ago. In Cincinnati, the basis was US$0.30 above Chicago. In western Kansas, home to ethanol makers and cattle feeders, the basis from January-May was the highest in four years.

 

Scott Irwin, agricultural economist at the University of Illinois, says the corn isn't there. Irwin and Illinois colleague Darrel Good say the persistently high basis is evidence from the marketplace that USDA has over-estimated the corn supply.

 

"Basis is still screaming shortage," said Irwin in mid-May. "The problem is getting worse."

 

There are ways to stretch the supply. Livestock producers could feed wheat instead of corn to their animals and the early spring planting season means some of this year's corn crop will hit the market early.

 

Regardless, traders and analysts have complained since June 2010 that USDA is too optimistic about stocks and USDA's estimates of stocks are less reliable than they used to be. The disagreement in viewpoints can jolt the markets.

 

In one day in June 2011, corn futures prices plummeted a record 10%, or US$0.69 a bushel, when USDA said corn supplies were 10% larger than expected. This year, the next USDA corn stocks estimate will be released June 29.

 

"I suggest treating all USDA corn data as if it were infected with a deadly virus," said one of the sharpest critics, John Macintosh of Rand Financial Services Inc in Chicago after USDA's stock estimate in March. He says USDA was slow to account for drought losses in South America and under-estimated corn usage at home.

 

Macintosh says corn stocks are headed for unprecedented tightness and cites the "extraordinarily strong" basis as a corroborating signal.

 

Not everyone agrees that local prices are an iron-clad gauge. Bill Tierney of AgResource Co in Chicago sees more factors in the corn supply picture than suggested by basis.

 

Farmers erected enough grain bins since 2006 to expand their storage capacity by 10% and, thanks to high crop prices and record-high income, have less need to sell grain to pay their spring-planting bills. From May 2011, USDA has projected unusually tight corn supplies, which could inspire farmers to wait for high prices.

 

Tierney maintains that corn prices are much more sensitive to tight supplies since the ethanol boom began in 2006. The biofuel's share of the corn crop doubled in five years while US corn production rose by less than one-fifth. Corn reserves are much smaller than they used to be. Disappointing harvests in 2010 and 2011 thinned supplies as well.