Is it too early to say “corn shortage”? Friday’s USDA report showed that 2007/08 would be one of the tightest world coarse-grain stocks on record. Any weather disruption will affect our ability to meet the world’s constantly growing need for corn.
In the United States alone this year, we have increased the projected plantings of corn by 12 million new acres. That is up 18% from last year. Conversely, in the latest crop supply-and-demand report, we see U.S. projected ending stocks increasing by 10 million bushels? We attribute this to slow planting at the beginning of the season due to weather conditions and dynamic domestic disappearance. During those beginning stages, the market rallied because planting progress was only at 23% versus the average of 42% a year earlier. Then, the corn market corrected from May 4 to May 10 on news that planting was catching up. According to data released May 14 by the NASS, it appears all 18 key states are back in line with five-year averages.
Money in the ground
Presently, fundamentals favor the bulls. While it may seem that the record acres of corn would provide for a bearish tilt, it’s just too early to tell. My main concern now is a lack of rain across the plains, having already fallen behind the average precipitation levels. This is cause for concern, but not alarm. For one, this will allow the farmers to finish getting new crops in the ground and remain on schedule through the rest of the planting season. Secondly, farmers for the most part do not mind some dry periods after planting. These stretches allow for and actually promote root development in young seedlings as they “grab hold” of Mother Earth and look for moisture. Make no mistake, precipitation will be welcome when it eventually rolls through.
The 500 lb green gorilla
No article about the price of corn would be complete without mentioning the demand for ethanol. As a fuel, ethanol is a high octane, clean-burning energy source derived from renewable sources. In the United States it comes primarily from corn and in Brazil they use sugar. Currently corn-based ethanol is used as a replacement for 4% to 5% of U.S. gasoline supplies. In 2006, there were 72 ethanol plants either introduced or built, and a decent number of the existing 116 plants were expanding production. Production has expanded from 3.4 billion gallons in 2004, to 5.0 billion gallons in 2005, and 6.0 billion gallons in 2006. While trying to forecast what the new and planned facilities will have to contribute, projections have the U.S. ethanol production pegged at 18 billion gallons within the next year and a half.
In about a week the summer driving season will be upon us. Another year of tight refinery production should send gasoline prices to record highs. This year I fully believe corn prices to follow suit. Until more is known about the crop condition, I would suggest that you trade extremes: selling big rallies and buying big dips.
Brian Cullen
Senior Market Analyst
New World Trading
bcullen@newworldpro.com
(888) 552-8253
DISCLAIMER: Future and options trading involves substantial risk. Information provided in this correspondence is intended solely for informative purposes and is obtained from sources believed to be reliable.
