One factor silently starting to dog USDA corn statistics is the agency's estimate of the proportion of corn planted acreage that has been reduced to silage. Although this year's drought devastated silage yields as much as it did corn, it still left silage offering attractive returns relative to a seriously damaged corn harvest seen in some regions of the Midwest.

 

Last year's silage yield was 18.4 tonnes an acre but even if this year's yield falls by half, thanks to silage prices of US$104/tonne, it remains a cost effective option: It would generate the same return as corn at US$8/bushel, at a time when corn is trading  nearUS$7.50/bushel.

 

With silage yields creating a strong incentive to cut down this year's degraded crop, many analysts think that 3 million acres or 3.3% less land will have corn harvested than the USDA is projecting. That makes for a wide difference between the USDA's 9.5% of sown corn abandoned and the up to nearly 13% abandoned that silage economics implies. For example, during the comparably severe 1988 drought, the proportion of land abandoned was 14%.

 

On paper, silage does not cause an immediate supply disruption. In a drought-afflicted year such as this one, it is damaged corn being recycled back into feed, though not as much feed as would have been made had the harvest been a good one. But by reducing the supply of corn available, a higher silage number increases the competition between the feed and biofuel sector, as silage is not used to make ethanol.

 

In this way, despite the fact that macroeconomic downdrafts are keeping corn below US$8/bushel, the market may be in for a supply shock in the latter half of the fourth quarter.