Rain has arrived in Argentina. Too little, too late, though. About 80% of the crop is past the pollination stage. The balance of the crop has just been planted recently and will benefit from the wet weather.

Any hopes that Argentina was going to alleviate tight global corn supplies have been dashed. Consider the magnitude of the disappointment. Based on acreage and trendline yields, analysts expected a record crops that would be about 25% larger than the previous record crop of 23.3 million tonnes harvested in 2009-10.

The January USDA crop report responded to the drought by slashing the estimate for Argentinean production by 3 million tonnes from its December estimate, to 26 million tonnes. That is now ancient history. Forget about record crops – it is doubtful whether output will reach last year’s 22.5-milliontonne harvest. Some estimates are as low as 17 million tonnes. With Argentina typically the world’s second largest exporter behind the US, not only does the Argentinean crop do nothing for global inventory levels, it stands to exacerbate the problem of already low inventory levels that have plagued the corn market.

The 17-million-tonne estimate is somewhat of a stretch. But even assuming that estimates for the drought-ridden crop fall to 20 million tonnes, which would lower 2011-12 global ending stocks to 122 million tonnes, or 14.07% of usage, down from 14.7%. Bears don’t want to hear this, but that is down from 17.5% in 2009-10 and 15.2% in 2010-11. In fact, it would be the lowest global carryout since ending stocks began to plummet when ethanol producers began to share the US corn crop with the feed market in earnest in the early 2000s.

Well, it all sounds pretty bullish, but there are two mitigating factors.

First, while it is still a bit premature to speak of the 2012-13 US crop, there have been earl acreage estimates. Informa Economics is forecasting that corn area will expand dramatically to 94.75 million acres, close to 3 million acres, or 3%, above the 2011-12 area. That would be a modern day record and, with no surprise from the yield side, should produce a crop of roughly 14 billion bushels, which compares with 12.358 billion bushels and 12.447 billion bushels in 2011-12 and 2010-11, respectively. That would be an increase of about 13% over last year and, even with moderate demand growth, would push the global balance sheet back to a carryover of perhaps 18% of usage.

The Argentinean situation is clearly a very bullish and unexpected event that could affect prices in the short term. However, a successful 2012-13 US crop, to be harvested in eight months’ time, will dwarf the amount of corn lost to the South American drought.

The other issue is the elimination of government subsidies in the ethanol market. As we mentioned in the January 12 issue of Focus on Futures regarding sugar, as of January 1 the 54¢-per-gallon tariff levied against Brazilian ethanol imports as well as the 46¢-per-gallon tax credit for US ethanol producers ended. Thus far, there has been no impact. The USDA maintained its estimate for ethanol usage, at 5 billion bushels. Besides which, the Brazilians are in no shape to ship any significant amount of ethanol to the US in the present environment. They are actually net importers of US ethanol at the moment.

Eventually, though, US producers will be forced to compete with Brazilian prices, and there is no evidence that this will be possible without the comfort of the tariff and the subsidy.

On December 30 we advised using rallies to establish short positions. We no longer believe this is a wise strategy, because the Argentinean situation may be quite serious, and the market can remain strong for some time. Cover short positions for now, but stay tuned.