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Corn Supply Slumps Most Since ’75 on Ethanol Profit

March 27, 2013
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March 27 (Bloomberg) -- Corn supplies in the U.S., the biggest grower, are shrinking at the fastest pace in almost four decades as improving demand from ethanol refiners drains reserves already diminished by drought.

Stockpiles probably fell 38 percent in three months to 4.995 billion bushels (126.9 million metric tons) by March 1, the biggest drop since 1975, according to the average of 31 analyst estimates compiled by Bloomberg. AgResource Co. in Chicago and Northstar Commodity Investments Inc. in Minneapolis expect prices to jump 13 percent to $8.25 a bushel before supply rebounds with a record harvest in September.

After idling refining capacity when corn reached a record in August, ethanol plants expanded output since January as falling grain costs and rising fuel prices drove profit margins to a nine-month high. Demand from the industry, which uses two of every five bushels in the U.S., provides the "strongest upside risk" for corn, Goldman Sachs Group Inc. said March 11. That’s boosting feed costs for meat and dairy producers even as global food prices extend their longest slump since 2009.

"Corn supplies are going to be tighter than we have ever seen," said Kent Jessen, the director of merchandising for West Des Moines, Iowa-based Heartland Cooperative, which has 52 grain terminals across 17 counties. "Some people are going to run out of corn this summer. Ethanol processors are the best bid for corn, and that is drawing supplies away from exporters and livestock producers."

Output Drop

Futures on the Chicago Board of Trade have gained 4.1 percent this month to $7.325, reaching a six-week high March 21. The Standard & Poor’s GSCI Agriculture Index of eight commodities is up 1.8 percent, while the MSCI All-Country World Index of equities advanced 1.1 percent. Treasuries were little changed, a Bank of America Corp. index shows.

Last year’s U.S. drought was the worst since the 1930s, cutting U.S. corn production by 13 percent and leaving inventories on Dec. 1 at 8.03 billion bushels, the lowest post- harvest tally since 2003, government data show. Analysts expect a U.S. Department of Agriculture report tomorrow will show March 1 reserves at the lowest for that time of year since 1998.

That’s boosting prices for grain available before the Midwest harvests start in five months. Corn futures for delivery in May fetch a premium over the December contract that has surged 61 percent this year and touched a seven-month high of $1.67 a bushel March 20.

Ethanol Profit

Ethanol prices in Iowa, the biggest corn-growing state, jumped 22 percent since Jan. 4, according to the USDA. The industry cut output by as much as 16 percent from a peak in June, after corn surged to a record $8.49 on Aug. 10.

Inventories of the fuel that normally increase in the months before the summer driving season tumbled 11 percent since mid-December, Department of Energy data show. Ethanol is blended with gasoline in most of the U.S.

"The roof is going to blow off the corn market if we don’t slow production," said Mark Schultz, the chief analyst for Northstar, a cash-grain trader and broker. "Corn prices could rise to $8.30 to finally shut off demand and prevent regional shortages before the harvest."

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