Corn: No room for error

Last year’s drought resulted in a U.S. corn crop that was 25% smaller than farmers’ planting intentions. So despite the fact that some areas of demand are so weak, it’s hardly surprising that ending stocks for the 2012-13 marketing year are the lowest they’ve been since the1995-96 season. The March USDA crop report estimate was equal to the February estimate, but slightly below analysts’ expectation, at 16.6 million tonnes (632 million bushels), or a scant 5.6% or consumption.

The rationing process has worked well for the most part. High prices have certainly curbed export demand and have set the stage for a bumper 2013-14 crop as farmers were able to lock in their crop at historically high prices. On the domestic-demand front, however, the situation is mixed. Corn-based ethanol usage is down about 10% from last season, replaced in part by Brazilian sugarcane-based ethanol. The Department of Energy’s ethanol usage statistics are roughly in line with the USDA’s estimate.

Feed usage is at about the same level as last year, which is about 10% below the average of the previous 10 years. The near term market is definitely tight, though. Cash corn prices have commanded a steep premium over May futures over the past few weeks (Chart 1). The near-term tightness is being alleviated to some degree with feed wheat substitution. Wheat prices are trading near historic lows vis-à-vis corn prices (Chart 2). There will be greater clarity on the domestic situation with the month-end release of quarterly stocks.

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