November 28, 2007

 

US corn may hit US$5/bushel in 2008

 

 

Prices of US corn could soar to a milestone US$5 a bushel next year on solid demand from the food and fuel sectors and a weak dollar boosting exports, however slowdown in global economic movement due to the credit crunch could be a major obstacle.

 

The US$5 a bushel surge, from $3.85-3/4 at the close on Monday (November 26), could lift prices for a range of foods from milk to meats in the United States, where concerns over food price inflation are growing as oil marches toward US$100 a barrel.

 

The United States is the world's largest grower of corn-- the grain used to produce feed for livestock and poultry as well as feedstock for ethanol, an alternative to high-priced oil.

 

According to Gavin Maguire, analyst for brokerage Iowa Grain, prospects for corn next year remains bullish as it is also fighting acres against soy.

 

"The $5.00 per bushel level for corn is certainly not a silly target to think of given the scope of global demand that's not going to back off a bit," he said.

 

With a limited amount of land available for corn and soy in the US, prices of the two crops have to be high enough to encourage farmers to grow them.

 

Recently, soy prices have soared to 34-year highs due in part to "buyback" acres from corn. Corn plantings soared 20 percent to 93.6 million acres this year -- the most in more than 60 years -- while soy acreage plunged nearly 16 percent to 63.7 million after corn futures rose to 10-year highs in March.

 

In March, corn futures rose to a 10-year high of US$4.37-1/4.

 

Explains Shawn McCambridge, analyst for Prudential Financial, a lot of what happens to corn prices will be dependent for soy. He said soy sector is "tight" this year as it needs more acreage, thus, a tight competition between corn and soy is expected next year.

 

The stage is now set for a swing back to soy plantings since soy prices in the Chicago Board of Trade (CBOT) in late November went up above US$11.00 per bushel -- its highest level since the record high of US$12.90 per bushel in June 1973, more than 34 years ago.

 

Veteran grains analyst Jerry Gidel of North America Risk Management Inc agreed that corn prices have the potential to increase but he was more conservative in his price outlook.

 

He said corn prices could hit US$5 a bushel if there was a crop weather problem next spring and "you have to have 7 or 8 million (acres) down and then turn around and have an issue with weather."

 

Large investment funds or index funds may beg to differ. Over the past year, they have built a huge net-long position of 358,184 contracts, nearly 1.8 billion bushels and about 25 percent of the total open interest in CBOT corn futures.

 

According to Maguire, the risk is "more to the upside than to the downside and if we've learned anything from these markets recently, it's that historical norms and previous price highs are not really set in stone."

 

Analysts are also watchful on the global economy, especially the surging economies of China and India and their huge appetite for commodities.

 

McCambridge said he is "removing" China from the export sector as its demand is stronger than supply. US will definitely fill the supply gap, he said.

 

Though China is a big producer and exporter of corn, analysts comment that the country will not want to sell any corn next year because of the country's expanding livestock feeding and ethanol sectors which each depend on abundant corn supplies.

 

The analysts also cautioned that a global economic slowdown could hamper the corn market's march to lofty levels.