November 6, 2008

US corn prices drop 50-percent amid high ethanol production


Corn prices plummeted 50 percent as US corn supplies remained tight amidst reports that ethanol, a by-product from corn, was profitable.

For corn, USDA lowered the 2008 corn production estimate to 12.033 billion bushels from 12.2 billion in the Oct 10th report. They also reduced feed use by a modest 50 million bushels to 5.3 bushels. The result was a lowering of the 2008-09 corn ending stocks forecast to 1.088 billion bushels from a 1.154 billion in Oct 10th, according to a report from Resource News International.
With corn supplies this tight, looks for nice post harvest rally are definite, certainly back to the $5.00/bushel level and then a robust struggle between corn and soy for planted area in the spring. An improved outlook for domestic barley prices in western Canada are also on the cards.
RNI Grain and oilseed futures at the ICE Canada futures market closed the week ended Oct 31st mixed with rapeseed down. Rapeseed declined despite the firm tone in the US soy complex. The lack of fresh demand and a large rebound in the Canadian dollar weighed on prices in fairly light activity. Feed barley rallied on strength in US corn and slow farmer selling. There was little fresh news across the Winnipeg market with the economic turmoil creating a cautious tone.
Chicago futures were mainly higher as the markets bounced back as increased stability in the financial situation allowed the fairly friendly grain news to lift prices for the first time since September. A softening in the US dollar gave some support. Soy rallied on continued strong export demand and talk that soy yields in the delayed US harvest were coming in poorer than expected. Corn futures advanced on tight cash market supplies and the delays in the harvest, with only about half the crop harvested.


US wheat futures in the 3 US futures markets rallied back on continued strong export demand and ideas that prices are undervalued. A weakening in the US dollar contributed support as well. Smaller Australian and Argentine wheat crops also helped to boost values.


USDA revisions indicated that there were 1.2 percent fewer corn acres and 1.4 percent fewer soy acres planted. USDA said that they felt obligated to release these numbers in order to correct some faulty data maintained by the USDA's Farm Service Agency.


The trade is a bit more cynical about the release feeling that it was part of a coordinated effort by the US government to rally equity and commodity markets. The move came as all markets were plunging and the US government was spending trillions of dollars to attempt to stabilise the economy.


Regardless, the reports are friendly for the markets and suggest that once the current financial instability is history that we will see a reasonably strong price recovery in both corn and soy.


USDA lowered the US 2008 soy crop estimate to 2.938 billion bushels from 2.983 billion bushels on October 10. They also dropped the export estimate to 1.02 billion bushels from 1.05 billion bushels. As a result, USDA estimated 2008-09 soy ending stocks at 205 million bushels, down from the previous forecast of 220 million bushels. This is a tight supply and suggests that soy futures will also see a significant rally after the financial problems are resolved. The expectation is that prices will climb back to the US$10.00 level quite quickly.


The International Grains Council raised their wheat production estimate and ending stocks estimates to reflect better crops. They also brought their numbers in line with USDA forecasts.


They did note that 2009 winter wheat planted area is down globally, but gave no estimate for the drop. Private analysts feel that global acres will be down between 5 percent and 10 percent. With lower fertilizer use, analysts are looking for average yields to be down. This could be setting wheat up for a strong rally in 2008-09.


Corn prices have almost dropped in half despite the fact that use of corn for ethanol production has not abated and the US ethanol industry continues to expand. There are 178 plants producing ethanol in the US with another 25 in construction. Ethanol production will likely hit 13 billion gallons by 2009.


The US government has mandated ethanol consumption by 2009 at 10.9 billion gallons and it looks like the US will make it.


A recent study at the University of Illinois, albeit funded by Illinois Corn Growers Association, found that the global warming impact of an ethanol plant is 40 percent less than gasoline production. The study looked at both the actual production plants involved in producing the two as well as the land use impact.


Canada's bio-fuel production is also climbing and within a few years we are likely to see 2 million tonnes of feed wheat and 2 million tonnes of canola moving into bio-fuel production. The increased use domestically will be good news for farmers who will not be at the vagaries of the export market.


The larger domestic consumption of feed wheat and canola for bio-fuel will come at the expense of the export market as less grain is diverted off-shore. Prices to farmers for their supplies to be used for bio-fuel will likely also be higher than in the export market.


Currently, ethanol producing plants in Canada are paying $4.63/bushel in Alberta and $4.66/bushel in Manitoba for feed wheat, well above what elevators are paying for feed wheat.

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