From the June 01, 2011 issue of Futures Magazine • Subscribe!

Grains outlook: Southern fried corn

Markets

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It’s happening again. The corn market has put itself in a "can’t-fail" situation. Instead of pushing prices high enough, early enough in the marketing year to slow down use and hold up inventories, the corn market’s slow response to tightening supplies allowed expected stocks to drop too low.

In April, the United States Department of Agriculture (USDA) estimated 2010-11 corn carryover at 675 million bushels — just 5% of expected use. But that’s what is left. Shift your perspective of that number just a bit by sliding it from the bottom of the 2010-11 supply/demand balance sheet (see "Inside corn") to closer to the top of the 2011-12 table in the "beginning stocks" category.

If 2011-12 use is just steady with 2010-11, we’ll start the new marketing year on Sept. 1, 2011 with just 5% of expected use in the bin. That means 95% of demand (again, if use is steady with 2010-11) must be met by the 2011 corn crop. That’s why the corn market — from growers, to futures traders, to end-users and importers — can’t fail in 2011.

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Dominos falling

The USDA’s April Supply & Demand Report sent several messages and they were fairly easy to hear. For one thing, the USDA’s number crunchers said they are borrowing from the future. They expect increased soft red winter (SRW) livestock feedings this summer to reduce demand for old-crop corn. And they expect increased corn plantings in the South to provide an early supply of 2011-crop corn — early enough (with enough bushels) to help hold old-crop corn carryover up to 675 million bushels.

Borrowing from the future probably happens every year. In fact, we argue it happened at the end of the 2009-10 marketing year when early harvested corn moved back in time to inflate Sept. 1, 2010 corn stocks to 1.708 billion bushels. But when analysts questioned the surprisingly high corn carryover, the USDA’s National Ag Statistics Service (NASS) said there was no commingling of 2010-crop with the old-crop supply. This year, not only is the USDA saying there will be commingling of new- with old-crop supplies, it is counting on it.

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