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Bushels of Profits: It’s Demand Versus Supply

April 2, 2014
By: Chip Flory, Pro Farmer Pro Farmer Editorial Director
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After the 2012 drought put a chokehold on domestic demand as well as export demand for corn, the 2013 corn crop restocked supplies for a demand-drained market. But has the market really been drained of demand? Big supplies typically do weigh on corn prices, but prices can move to the upside quite quickly in years with hefty supplies if demand chews through available supplies. If corn demand quickly recovers, periods of low (or no) profitability are drama­tically shortened.

Before ethanol production added about 5 billion bushels of annual demand to the U.S. corn market, it took a long time to rebuild domestic demand. That’s because domestic demand was primarily feed consumption. If poultry flocks and hog, beef and dairy herds were culled to reduce total corn demand in tight-supply years, then it took time to rebuild corn demand from rebuilt flocks and herds.

With ethanol, U.S. corn consumption can be throttled back to reallocate stocks from one end user (ethanol) to another (livestock and poultry). When supplies are recharged, the throttle can be pushed ahead to rebuild domestic use much more quickly.

The quick recovery in domestic demand is what will likely shorten the period of low (or no) profitability in crop production for one to three years, rather than three to five years, as seen in past farm profitability cycles.

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Ethanol is expected to continue to be a large and likely growing segment of demand for U.S. corn, suggesting that corn prices could be supported at higher levels than expected during abundant supplies.  Source: Pro Farmer



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FEATURED IN: Top Producer - April 2014
RELATED TOPICS: Corn, Top Producer

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