Old-crop futures remain strong despite weakening ethanol demand
Expect old-crop corn futures to stay strong while new-crop prices—depending on the weather—stay under pressure from planting progress and projections for a huge crop.
"We do look for higher prices on old-crop futures," said Rich Nelson, research director at Allendale, Inc., McHenry, Ill.
Strong old-crop demand likely will lead USDA to trim its ending stocks projection from 801 million bushels projected in March and April. Nelson said some analysts expect the projected carryover to fall to 750 or 700 million bushels, or roughly 5.5% of total use.
China's buying is one reason for higher demand and prospects for lower stocks.
Old-crop corn futures led the rally April 27 after USDA announced that private exporters had reported sales of 1.44 million metric tons of corn for delivery to unknown destinations for 2012-13 and 120,000 metric tons to China from the old crop. That came on top of the April 24 announcement of 480,000 metric tons of old-crop corn to unknown destinations, and 120,000 tons to unknown destinations April 23. Traders expect that much of the business to unknown destinations will go to China.
The huge sale announced April 27 fueled a rally that carried May corn futures up 29¢ and July up 18¢, but new-crop prices rose only about 3¢. The rally carried May futures to $6.53, still well within the six-month range of about $5.80 to $6.80.
"We have not broken out of that range yet," said Brian Hoops, president of Midwest Market Solutions, Inc., in Springfield, Mo. The new lead contract, July, needs to get above about $6.59 to rise from its recent range. "I think we still have some upside potential," said Hoops, even though he said he thinks China has covered a lot if its needs. He cited Commodity Futures Trading Commission data showing strong commercial buying by big commercial traders in late April.
Ethanol Demand Down
Falling demand from the ethanol industry may weaken old-crop prospects, Hoops said, but he puts ethanol demand in third or fourth place as a market factor. He expects traders to look first at weather for new-crop development, then export demand, feed use, and ethanol production.
The April 30 Ethanol Outlook Report from the CME Group showed why ethanol corn use is off. May contract ethanol-corn crush margins dropped to a negative 13.5¢ on April 27, "indicating that U.S. ethanol producers are under fairly severe margin pressure," according to the report. Distillers' dried grains income raised the margin to a positive 24.1¢, but that's not enough for many producers to pay their other expenses.
Ethanol production in the second two weeks of April fell to a 6.5-month low, but inventories are within 4 percent of their record high. "U.S. ethanol production may need to decline further in order to bring U.S. ethanol inventories down to more sustainable levels," said the CME report.