The month of July was an unmitigated disaster for corn pollination. One of the hottest Julys in 40 years coupled with a record number of warm nighttime temperatures have devastated any hope of achieving good yields. The likely outcome will be a national corn yield near 152 bushels per acre. Harvested acre estimates likely between 1 million and 2 million acres are too high. This would place overall U.S. corn production near 12.7 billion bushels.
Current United States Department of Agriculture estimates are for corn demand to be near 13.5 billion bushels in 2012. During the post-crash year of 2009, corn demand fell by 800 million bushels. Even if we assume a similar Draconian decline in corn demand for 2012, that still would place overall demand at 12.7 billion bushels, which would be equal to production. It is doubtful that demand for corn will fall by 800 million bushels this time around.
Bottom line: Overall corn supplies will not be able to increase this growing season despite the best efforts by farmers. Outside of temporary bouts of fund liquidation because of the current bearish macro factors, the downside in corn seems very limited between now and the spring 2012 planting season. Should the corn market make any quick declines to the low $6 range because of outside forces, it would be a solid buying opportunity. Hopefully next year Mother Nature cooperates.
However, owning corn may not be the best way to play this bullish fundamental outlook. As a result of the corn market's yield debacle, one must be hyper-bullish CBOT wheat. "Cheap wheat," (below) shows the long-term correlation of wheat vs. corn. As you can see, wheat is historically undervalued in relation to corn and this can mean only one thing: Substitution feed demand for wheat globally as a replacement to corn feed is going to skyrocket. In fact, evidence already is showing as much as a 20% increase in feed wheat demand from a year ago. That could be the highest feed demand for wheat in two decades. Although at the moment wheat supplies look plentiful, they will evaporate before your very eyes. As global wheat disappearance grows, global supplies will begin to get very tight again and wheat will begin to rise and outperform corn in a major way.