Bulls Grazing in the Corn Field

By Don Bousquet

In late June, corn prices were almost triple where they were a year earlier, an unprecedented rally sparked by fewer U.S. corn plantings and ongoing strong global demand. The December futures contract hit a record high of $7.97 per bushel on June 27, and corn prices seemed to be well on the way to the moon.

Fast-forward one month and December futures are hovering just below $6 after seeing their steepest decline in 12 years.

So what happened?

On June 30, the rally was dealt a sudden blow when the government reported plantings were not as weak as initially thought. The U.S. Department of Agriculture forecast that U.S. farmers had planted 87.327 million acres of corn, up from their original estimate of 86 million.

The forecast still well below the 93.6 million acres planted in 2007, but it was a shock to traders nonetheless. They were betting heavy spring rainfall and flooding had interrupted U.S. corn plantings. The fresh USDA numbers showed that farmers, determined to make the most of high prices, would still find a way to get more acres planted.

Shorts were quick to enter the market after the higher-than-expected acreage report, and prices turned modestly lower. But another twist was in store.

On July 11, the USDA issued its supply-demand balance sheets. After raising the acres estimate for the corn crop at the end of June, it then cut the average corn yield to 148.4 bushels per acre from its June forecast of 148.9 bushels per acre. The result was a decline in the crop size estimate in July to 11.715 billion bushels, from the June forecast of 11.735 billion bushels, despite the increased plantings.       

However, offsetting the decline in production were signs that the high prices were indeed rationing demand, as estimates for corn used for ethanol production were lowered from 4.0 billion bushels to 3.95 billion bushels.          

Ethanol: A Question Mark?

The record high corn prices were negatively impacting the ethanol industry. Construction of three new plants was delayed this spring, and 12 plants went broke.

The ethanol industry was also under attack from a variety of sources, including livestock feeders, the governor of Texas, environmentalists and politicians, who blamed the rising cost of food on the renewable energy. Those against using corn to make ethanol blamed it for 75% of the increase in grain prices. Those who supported it said that it accounted for no more than 3% of the grain price increase. They blamed the improved diets and rising economic clout of China and other parts of the Third World, as well as weather problems, for driving the corn price to record levels.       

So who was right? No one can know for sure, but less-biased analysts felt that between 12% and 15% of the corn price rise was attributable to ethanol production.

Despite the ethanol industries problems, U.S. ethanol capacity hit 9.25 billion barrels in July 2008, up 45% on the year. Since June, many ethanol plants have been profitable and the recent decline in corn prices has enhanced the profitability of the plants.

The industry though is still facing a U.S. Environmental Protection Agency ruling in August that could roll back the law mandating a fivefold increase in the blending of ethanol into gasoline to 15 billion gallons by 2015. Texas Governor Rick Perry petitioned the EPA this spring to cut the mandate to half the current level starting this year.          

The Texas governor's move came in response to the problems in the livestock industry from the high price of corn. It could cut the mandate from 9 billion gallons of ethanol use this year to just 4.5 billion, which would cut corn consumption for ethanol production in half, leaving more for livestock.

More than 15,000 petitions have been sent to the EPA, most detailing the hardship people are sustaining from the high price of corn. However, there were also petitions supporting ethanol production from corn.

The recent decline in corn prices has taken some of the heat off the ethanol issue. And the current U.S. administration, is still highly supportive of ethanol produced from corn.

The need for energy independence seems to be trumping the problems caused by high corn prices. Texas billionaire T. Boone Pickens summed it up best when he said that "Ethanol is an ugly baby ... but it is our baby ... I'm not against any fuel unless it's foreign."

Pickens, speaking to U.S. lawmakers on July 22, predicted that oil prices will hit $300 per barrel within 10 years if the U.S. fails to reduce its dependence on foreign oil imports. He added that the U.S. currently imports almost 70% of its oil needs and that will hit 80% within 10 years if alternatives are not found.            

Corn Outlook Friendly, Volatile

All of this augurs well for the corn outlook, and analysts are looking for U.S. farmers to respond in 2009 to the relatively high prices by planting as many as 95 million acres of corn.          

Traders I talk to generally are looking for the current supply-demand balance to hold corn in a trading range of $5.50-$7.00 per bushel, based on futures for the 2008-09 crop year.

However, there is still a slim chance that corn could rally back to the historical highs of June, mainly for agronomic reasons.

The excessive moisture of this past spring has left the corn crop root shallow, which means it is more susceptible than normal to any hot, dry conditions that develop. The crop is also entering its critical reproductive stage much later than normal, making it susceptible to seasonal summer heat. The lateness of the crop will also make it vulnerable to any frost concerns toward the end of the growing season.

This all means that we can expect to see a lot of volatility in corn markets right through the harvest this fall.  

The corn market will also see an upward price push in the late winter and early spring of 2009, as corn battles other crops for planted area. The high price of inputs for corn production will mean corn prices will have to sustain a strong rally in order to get acres planted. Competing crops are much cheaper to plant, so corn will have to reward farmers for taking the extra risk.

Record high prices for corn may very well be behind us. But the bull run in the commodity is far from fading.

Comments

[fxtrader07:]

'Since June, many ethanol plants have been profitable and the recent decline in corn prices has enhanced the profitability of the plants.'
you mean, with the hude subsidies paid for by the ordinary citizen?
T Boone Pickens may have made a ton of money, but even billionaires can say pretty stupid things. and the quote you cited from him is such a very stupid thing. ethanol from corn only transforms energy and needs vast resources (corn, fertilizer, acreage, water, money(subsidies)). net-net you get no more energy out than you put into the process - a giant scheme of wasting money and resources. Ethanol is not an ugly baby - it is a dead-born child. it needs to be buried and put to rest asap.
and trhen, btw. will you be able to observe how much of the corn price increase was really attributablöe to the ethanol nonsense. my take is, it was more than 40%.

2008 Jul 29 03:57 AM

[sbenard:]

I always get a kick out of these people -- like Congressmen -- who just KNOW that XX% of the price of a commodity price is due to one factor or another. No one really knows! They're all fools!

What we DO know is that much of the price appreciation is due to political policies like overspending that devalues the Dollar, ethanol mandates that fxtrader has eloquently elucidated, banning domestic energy production, and the Global Warming Inquisition, the new religion of the lunatic left.

The reality is that while we know all these things are factors that are affecting prices in inflationary ways, we don't know how much. NO ONE can really quantify it accurately, because all these variables are constantly shifting each day -- even each hour -- and their interplay with each other is incredibly complex. All we can do is respond to what the markets are telling us, and that means that we need to remain fleet of foot.

2008 Jul 29 08:52 AM

[Tim Plaehn:]

Nice article, good facts, no ax grinding. Ethanol is here to stay as a industry and will change and evolve. Odds are, our next President will be from a corn state and support continued growth in the industry.

I currently like a combination of ethanol producer, VSE plus a fertilizer company, TRA to generate profits through the cycle.

2008 Jul 29 09:04 AM

[jdl51:]

There are some redeeming features of ethanol production. One, the system is a closed loop financially meaning we are not sending billions to the Arabs but keep it here at home. It is renewable so there's no danger of depletion unlike fossil fuels. I would suggest that during this period of high grain prices that the farm subsidies paid to not plant acreage be suspended which would lower our "conservative" record deficits and result in increased plantings and lower prices. Farm subsidies were meant to support prices, not drive them through the roof. And if they could just start producing ethanol from non feed crop sources that could be grown on marginal land I think it would work out better all around.

2008 Jul 29 10:41 AM

[Paul Killinger:]

SUGAR-based ethanol, which contains 6X the equivalent energy of corn, is a MUCH BETTER answer, as Brazil has already proven. That said, we're about as likely to utilize sugar to help stem our ENERGY EMERGENCY as we are to explore the OCS for oil and gas, speed up the development of oil shale, exploit already PROVEN alternative coal technologies, and, last but not least, develop ANWR.

It all comes down to a simple premise, then. Either we remove the Democrats in Congress from power and reverse the influence of their Green benefactors, or they'll get rid of us. For now, anyway, we're not going to do either one, so our only defense is to make wise energy investments to stay afloat until (...and if) that happens some day.

2008 Jul 29 11:31 AM

[Paul Killinger:]

Let's hope that's soon, though, so we and our nation's economy has enough strength left to benefit from it.

2008 Jul 29 11:36 AM

[ecco:]

JDL51, please take note: Corn DOES rely on fossil fuel. Large amounts of nitrogen are used as fertilizer in its production. Nitrogen is made from natural gas. Natural gas comes from the ground, can be depleted and IS a fossil fuel.
Doesn't anyone out there get it??? ALL energy production consumes fossil fuels in one form or another, and ethanol is the most inefficient in terms of its production AND use.

2008 Jul 29 11:39 AM

[Halp:]

JDL51
From a chemical viewpoint, is it possible to decrease the quantity of corn used for ethanol production by substituting a certain percentage of low quality feed crop, non feed crop, waste or paper mill byproduct in the process?

What would that (those) be the most promising alternative ?

Because most corn sources and ethanol plants are located in Midwest rural areas this second ingredient would need to be plentiful, nearby (transportation) and less affected by weather issues as they affect availability.

I have seen articles about using dairy and paper byproducts--( in Wisconsin) and orange waste (in Florida)

How would this would affect the quality of the wet/dry distillers grain .....a secondary source of revenue from ethanol production...?

2008 Jul 29 11:52 AM