August 2, 2008

 

Production and ethanol decision to determine near-term US corn prices 

 

 

The recent drop in corn prices may signal an opportunity for investors to enter the market again but ethanol production and lower demand could lead to a bearish market, analysts said.

 

Corn futures for December delivery soared 26 percent in June to as high as US$7.96 a bushel after Midwest flooding.

 

But futures in July erased all the June gains and dived to US$5.63 a bushel by July 23, the lowest in four months. Recent favorable weather further put downward pressure on prices.

 

Trading in the past few sessions, however, has seen signs of rebound in corn prices.

 

On Wednesday, the benchmark contract rose for a fifth day to end at US$6.21 a bushel on the CBOT but they are still about 20 percent lower than its all-time high.

 

However analysts expect corn prices to hover at this level until some bullish news comes up.

 

One strong boost could come in the form of a USDA report detailing the extent of the flood damage, which is due August 12.

 

In its most recent crop report released at the end of June, the USDA projected corn planted area for the 2009 crop season to stand at 87.3 million acres, 1.3 million higher than its March report. However, the report did not reflect the damage done by the flooding as more time was needed.

 

Analysts are expecting the report to show falling corn planting area and yields.

 

One reason was that before the flooding, the USDA has already reported that this season's US corn year-end inventories could fall to 763 million bushels, the lowest since 1996.

 

Furthermore, the USDA's latest weekly crop progress report showed that corn crop development is lagging behind last year and the five-year average, largely due to the damage caused by the flooding.

 

As of July 27, only 59 percent of corn crops were pollinating nationwide, down from 87 percent a year earlier and below the five-year average of 81 percent, the department said late Monday.

 

However, the disappearance in demand due to recent high corn prices could be a bearish factor for corn.

 

Corn use for food, seed and industrial needs are expected to fall by 65 million bushels this year, the USDA projected in July, and corn use for ethanol production will decline by 50 million.

 

However, recent price drops could "revitalize" consumption.

 

Then again, an Environmental Protection Agency's decision on a Texas petition for a half-waiver of the Renewable Fuels Standard, could stifle corn demand from ethanol producers.

 

The standard mandates US fuel makers to blend nine billion gallons of biofuel this year, mostly corn-based ethanol.

 

The EPA was originally slated to decide whether it will approve the petition but has postponed the decision to a later date pending more investigations on ethanol's impact on food prices.

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