Despite this year's cool, wet weather delaying spring planting in the central U.S., investment participation has been limited in the corn market recently, due to rising media and political concerns that expanding U.S. ethanol production is the cause of rising food costs around the world. The market also is focused on the first official 2007/08 U.S. and world corn and coarse grains supply/demand reports from the U.S. Department of Agriculture (USDA) on May 9.
After heavy rains delayed seedings in the Delta and southern Midwest early this spring, these abnormal conditions-along with below-normal temperatures in the main producing states-have limited this year's planting pace to the third slowest since 1993. Some states on both the east (IN 36% and OH 31%) and west (NE 31% and KS 42%) end of the Corn Belt have gotten some seeds in the ground. However, the central region has been plagued by recurring rains, cold temperatures, or both. Indeed, corn's two major states, Iowa and Illinois, reported only 18% and 28% paces respectively on Monday's update, versus the last five-year average seeding levels of 65% and 76% respectively by May 4. Poor weather also has delayed MN (8%) and WI (4%) seedings, resulting in a disappointing 27% overall U.S. planting progress for early May vs. last year's 45% advance and the five-year average of 59% for this date. With additional storms forecast for the Midwest this week and again early next week, there are concerns this year's U.S. corn plantings won't advance to the 70% level by May 15. In the past, this has signaled the higher likelihood of a below trend national yield for corn.
After April's old-crop demand adjustments, no changes in either feed usage or exports are expected. But the ethanol industry's restrained expansion this spring, due to building delays and tight margins, suggests this demand level could be shaved another 100 million bu. this month (see May 5 ethanol update), raising old-crop stocks to 1.383 billion bu. Big interest will be in the USDA's 2008/09 supply/demand projections. Normally, the USDA uses the same demand estimates that it issued at its annual Ag Outlook Forum, but last month's increase in old-crop feed usage could raise this level 100 million. Meanwhile, the recent old-crop decreases in ethanol could prompt a similar 200 million bu. drop for 2008/09, since 2009's corn ethanol level is 10.5 billion gal. That requires only 535 million additional bu over this year to fulfill the renewable fuel standard level. The price of gasoline ultimately will determine this demand level, not mandates, if energy prices continue to offer blending and processing margins.
The big unknown in the corn market is the size of the 2008/09 crop. This spring's wet weather has dashed prior hopes of 2 million additional acres, with some fears of even fewer corn plantings than the 86 million March intentions. This probably is unlikely, but the spring's slow seeding pace could slip the USDA's yield level to 153 bu. per acre. That's because previous years of good planting paces have prompted the USDA to raise its yield forecast. In the end, corn's 2008/09 ending stocks probably will be under 600 million bu., meaning any crop problem will prompt quick concerns and price-rationing higher prices.
With expanding world wheat area and output, overseas coarse grain supplies won't expand much, but reduced trade (due to increased wheat feeding) likely will keep corn and coarse grains stocks near current, tight levels. Look to use nearby strength to finalize old-crop sales (10%) and increase new-crop coverage to 50%-55% on a possible post-report December rally to the $6.50 area.
The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
