Did US farmers plant too much corn?

The true test of the viability of the US corn-based ethanol market is how it will fare without government handouts, now that direct subsidies to producers and import tariffs on Brazilian sugarcane-based ethanol imports have been terminated.

US ending stocks are estimated at 1.881 billion bushels, or 13.65% of consumption. That compares with 6.7% and 8.6% in 2011-12 and 2010-11, respectively, and the largest carryover since 2008-09.

Global ending stocks are estimated at 152 million tonnes, or 16.5% of consumption, up from last year’s 14.7%.

A significant amount of FSU winter wheat acreage will we be abandoned (see Focus on Futures, April 30), and the Ukrainian agriculture ministry issued a statement saying that the abandoned wheat area will be replanted with corn for the 2012-13 crop. This would increase the estimate for Ukrainian corn by at least 2 million tonnes, and that is not accounted for yet in the USDA 2012-13 balance sheet.

When we last wrote about corn on April 5, we were bearish for many of the same reasons presented above, but were hesitant to take an outright short position with most of the crop still to be planted. To participate in a bearish corn strategy, we advised a long wheat/short corn spread. As illustrated, however, with most of the crop in the ground at such an early date, planting is no longer an issue. Weather can still wreak havoc as the plants mature, but if all goes well, we can see corn prices retreating to 2010 levels.

chart 2

It’s been a while since we’ve faced burdensome corn supplies. Strong demand would certainly make a difference, but the USDA has already estimated US exports at 1.9 billion bushels, well above the previous two seasons and the highest level since 2009-10. So to a degree, improved demand has been factored into the balance sheet.

Sell July corn. Place initial stops at $6.40 per bushel, close only.

Maintain long July wheat/short July corn spread.

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About the Author
Sholom Sanik is an analyst with Friedberg Mercantile Group Ltd. He can be reached at ssanik@friedberg.ca
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