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.
Even though ethanol demand for corn has softened, Nelson said the industry ran so heavily in the first half of this crop year that 2011-12 corn demand for ethanol still is likely to exceed USDA's projection of 5 billion bushels.
Big Yield Prospects
Nelson is preparing for a big corn estimate from USDA this month.
The huge export sale announced April 27 was for new-crop corn, but Nelson doesn't expect a new-crop rally driven by export demand. Instead, the market will stay focused on production and prospects for rising supplies.
When corn planting progress is early, acreage tends to be on the high side of projections and yields tend to run above trend. As of April 29, growers had planted 53% of their corn acreage, up from 28% a week earlier and up from the five-year average 27% on the same date.
When USDA issues its World Agricultural Supply and Demand Estimates report on May 10, it will use the Prospective Plantings projection of 95.9 million acres and a projected yield adjusted for early planting. Nelson said the early planting adjustment might raise the projected national average yield to 166.2 bu./acre. If growers harvest 92% of the acreage, that yield would project to a crop approaching 14.7 billion bushels.
Late April and early May rainfall and warm weather probably will translate into a fast pace of corn emergence, Hoops said. USDA reported that as of April 29, 15% of the crop had emerged, compared with the five-year average 6%. The quick emergence likely will lead into ideas of early corn harvest and less old-crop tightness.
More Wheat to Feed
Wheat feeding also may ease some of the tightness in the old-crop corn balance sheet. As of April 29, USDA reported 54% of the winter wheat crop was headed, up from the average 24%. The winter wheat crop rated 64% good to excellent and 26% fair, leaving only 10% in poor to very poor condition. A year ago, 41% of the crop was rated poor or very poor.
"If wheat is similar to corn prices, we could see a lot go into feed," Hoops said. But if it's a good crop with high protein, he added, export demand and basis both will strengthen.