May 18, 2004

CBOT Corn's Recent Pricing Power Should Remain Strong

Even with projected record corn production, Chicago Board of Trade corn futures prices should remain relatively firm for quite some time as a series of events over the past year combine to keep prices above recent levels.

CBOT corn prices are down from their April highs of $3.42 basis Jly, trading just under $3 as of Monday as a potential record corn crop and speedy planting weigh on prices.

The U.S. Department of Agriculture estimates this year's newly planted U.S. corn crop to be a record 10.425 billion bushels. However, the government dropped the 2004-05 carryout by 65 million bushels over last year to 741 million bushels. Increased exports and robust ethanol demand caused the USDA to winnow ending stocks.

Additionally, competition in world export markets is limited by China's reduced exports to its south Asian neighbors, allowing the U.S. to recapture some of these customers. As the dietary needs of China's population continue to increase along with its citizens' discretionary income, animal feed needs will continue to increase at an expanding rate, so even a record U.S. crop may not make all that much of a difference.

U.S. acreage devoted to corn production, which was stable for years, turned upside down this year as farmers increased soybean acreage at the expense of corn to take advantage of high oilseed prices. Spreads between the old- and new-crop in corn are particularly tight compared with the spreads between old- and new-crop soybeans. With corn planted acreage expected to increase only 300,000 acres to 79 million, farmers have turned toward planting beans to capture those high soybean prices.

Ethanol production continues to expand in the U.S. Archer Daniels Midland, the agricultural processing giant, recently reported sharply higher earnings, in large part due to stronger ethanol prices. Usage of corn in ethanol production grew from zero 20 years ago to a projected 1.3 billion bushels this year according to the USDA, up 105 million bushels from last year. And if the recent sharp increases in gasoline continue, this figure will probably be short of the final usage number.

With planting progress basically completed across much of the corn belt, weather and its effect on the size of the 2004-05 crop will have a huge impact on corn price direction. However, it will take perfect growing weather to produce a bumper crop. Despite the USDA's forecast of a bumper crop, the resulting carryout of under 750 million bushels does not allow much room for error.  If better-than-expected economic growth occurs, prices will reflect the tight stocks situation. If less-than-perfect weather occurs during the growing season, corn producers should expect the unexpected and profit by it.