The Corn Conundrum

May 5, 2008

Corn is really caught in a conundrum these days — evident by the price moves on the Chicago Board of Trade futures market the past week. One day corn is the darling of the trade, rising to a high of $6.41-1/4 per bushel for delivery in December, the first contract representing the 2008 harvest.
     The next day it struggles amid the bashing of corn-based ethanol production that seems to be gaining hold in Washington. Several senators including Kay Bailey Hutchison (R-Texas) said this week it’s time to take a serious look at the U.S. corn ethanol mandate calling for 15 billion gallons by 2015 and 36 billion gallons by 2022. The federal mandate for this year is 9 billion gallons.
    “It seems like all the politicians are ganging up on ethanol,” said Vic Lespinasse, with grainanalyst.com in Chicago.
    Even the USDA’s chief economist Joseph Glauber in his testimony to Congress on May 1 included ethanol among the reasons for the rising price of food:
    “In 2007, the Consumer Price Index for food in the U.S. increased by 4 percent. This was the largest annual increase in retail food prices since 1990. In 2008, the Department of Agriculture’s Economic Research Service projects retail food prices will increase by 4 to 5 percent.
    “Several key factors are shaping the current situation, including domestic and global economic growth; global weather; rising input costs for energy; international export restrictions; and new product markets, particularly biofuels.”
    But so far nothing has changed officially on the demand side for corn. Ethanol producers are projected to use 3.1 billion bushels of corn this year, or 24 percent of the 2007 crop.
    So a policy change slowing ethanol demand would spark waves of spec profit-taking — and a tidal wave of grain hedge selling to lock in $5-6 corn on the board.
    On the other side of equation you have a wet, cold spring that’s raising concerns about how much corn farmers will be able to plant before May 15 — farmer’s target to plant corn so the crop reaches its maximum yield potential.
    Soil temperatures need to be roughly 50 degrees to plant corn and fields are saturated with standing pools of water in many.
    Traditionally, the last week of April and the first week of May are the biggest corn planting weeks in the Midwest. Not this year. Planters have been scarce and basic prep like discing or fertilizer application also are weeks behind.
    So far, U.S. farmers are off to their slowest start since 1999. The U.S. Department of Agriculture will issue its next crop progress on Monday afternoon. One would have to guess that depending on how much corn is planted –  it will drive CBOT prices Monday night and Tuesday. Preliminary guesses is for USDA to report 25-30 percent of the crop seeded, versus the seasonal average of 63 percent.
    Granted U.S. farmers can plant corn quickly given today’s 24-row planters. But it’s got to stop raining and warm up.
    “There is no sign of a major change in the pattern which means no wide window for planting for the next week to 10 days,” said Mike Palmerino, forecaster with DTN Meteorlogix.
    “There will be occasional planting when there’s a break in the rains … the stronger sun will work to their advantage.”
    It rained again on LaSalle Street on Saturday though the sun finally came out again on Sunday with temps in the 60s F.

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