Shrinking Corn Supply Driving Market Volatility

Using the data from the USDA and state agriculture bureaus it is quite possible that two million acres of cropland, which farmers had intended to plant with corn, will remain completely unplanted.  This would represent a two percent drop from the earlier estimates collected by the USDA in the Crop Planting Intentions Report.  Corn needs specific soil conditions to ensure a successful crop and a relatively long growing season.  Consequently, it is understandable that farmers would choose not to risk planting on these acres.  But why would they decide to plant nothing, essentially taking this acreage off the market for food production this year?  The answer lies within federal and state crop insurance programs. The payments farmers can receive by exercising the prevented planting option on their crop insurance policies will pay them more than the profit they could realize from planting other crops like soybeans.

It is also important to consider China when assessing where the corn market supply/demand balance.  Last year, agriculture experts and traders were surprised when China took a significant position in the global corn market after having been absent for over 15 years. On May 26, 2011 the USDA reported that China had indeed made purchases of U.S. corn for delivery before August 31st.  China is suffering just the opposite situation from U.S. Midwest farmers with severe drought conditions along the Yellow River Valley, a very productive agricultural area.  Should these conditions persist, China is certain to seek additional U.S. exports whenever corn prices show any sign of pulling back.  After the publication of the USDA report, futures prices for corn on the Chicago Board of Trade started to approach the all-time record levels set earlier this year.

Within the U.S., competition between ethanol manufacturers and livestock feedlot operators will become more intense as the remaining corn inventory dwindles. Some of the questions that will help settle the debates are:

• As consumer gasoline prices fall, will demand pick up this summer requiring more ethanol blending components?
• While year-to-date ethanol refining margins have been healthy, will the renewed rise in corn prices force marginal manufacturers to cut back on production freeing up some corn supplies?
• Feedlot operators have seen their margins decrease, but with animals needing feed, and their options limited, will they choose to reduce the size of herds?

Pressure on ethanol producers could follow in terms of reduced margins for lower crush spreads.  Gasoline prices have dropped significantly from their springtime peaks, thereby making ethanol a lower valued blending component.  In addition, Brazil has reversed its practices of importing ethanol from the U.S. during the last six months, and announced that it has begun to export production to U.S. markets.  Considering these changes in the marketplace, pressure on marginal ethanol manufacturers to cut runs will take place.  This market pressure will have a corresponding impact on RIN prices.

Near historic low ending stocks from the 2010 crop have created a tight corn market that may be exacerbated by sizable buying from China. Adding to that uncertainty are the vast differences in estimates for the 2011 crop carryout due to sever flooding and delayed plantings.  This uncertainty will only keep speculation in the market rampant and volatility high.