Friday's surge in corn futures may be just another step in a climb toward $8/bushel.
“Based on recent advances we've seen, I have to think that psychologically the market will get up and test the $8 area,” said Brian Splitt, a broker at Allendale, Inc., McHenry, Ill.
surged to $7.67 Friday, up 23.5 cents on the day and up 41.25 cents on the week. Contracts through July 2012 made similar gains to as high as $7.84 for July 2012.
“We've been rationing anywhere above $7 on the board,” said Darrell Holaday, market analyst at Country Futures, Frankfort, Kan. “But the problem is, we've been rationing based on a 150 bushel-plus crop.”
Pro Farmer estimated
the U.S. average yield at 147.9 bu. per acre, based on a tour of Midwestern fields during the week ended Aug. 26.
Yield prospects declining
“The market is starting to look a lot lower,” with some predictions of average yields as low as 141 or 142 bu., said Holaday. Yields that low would call for more severe rationing. “You'd have to take 1 billion bushels out of USDA's current use numbers,” he said.
USDA analysts surprised the trade with their August supply-demand report
. They pared the projected average yield to 153 bu., down from the July projection of 158.7 bu. Yields averaged 152.8 bu. and 164.7 bu. in the past two years. To offset the smaller crop, USDA cut its estimates of feed and residual use, ethanol demand, and exports. Those changes still left projected stocks at 714 million bushels, only 5.4% of projected use.
The Pro Farmer average yield estimate came in more than 5 bu. below USDA's most recent projection. “That's likely to push us to the $8 area,” said Splitt.
Corn futures have been close to $8 before, reaching a high of $7.9925 in 2008 and $7.9975 for the July contact this year.
Patient buyers may scramble
“I think buyers have been trying to be patient with markets,” said Splitt. “A lot of end users have their needs covered going into harvest.” Those who haven't bought corn for the new season may get caught in an emotional scramble for supply. A price of $8/bu. may trigger a rush to buy out of fear that prices will climb further.
Splitt said producers who haven't sold much of their 2011 crop aren't likely to start now; they might wait to see the market turn lower first. But he said a reasonable strategy is to get some corn sold in the cash market now and buy bull call spreads. He figures a mathematically cheaper approach is to hedge with futures and watch for seasonal basis improvement, but that approach brings potential for big margin calls.
Corn demand is still strong even after rationing at futures prices above $7/bu., said Holaday. August beef feedlot inventory and placements increased from a year ago, and June 1 swine inventories were up 1% for market hogs and up slightly for breeding stock. During July, broiler placements slipped 4% from a year earlier and eggs in incubators fell 6%. Ethanol production climbed in August.
Strength in major domestic demand categories leaves exports as a prospect for rationing. However, projected exports of 1.75 billion bushels won't likely absorb all the rationing. Exports have slowed, but sales are on the books. “They'll take their corn,” said Holaday of export buyers. “They've got it bought.”
That brings him back to ethanol as a place to ration. If corn futures push over $8/bushel, political pressure will mount to eliminate the mandates. The 45-cent blender tax credit likely will end, and the renewable fuel standard will be under pressure. “If you take the mandate away,” said Holaday, “Corn is going to struggle.”
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