Hefty demand for corn and intense competition for acreage, plus support from investors, likely will keep corn futures strong well beyond this today's sharp gains.
Fueled by USDA reports that showed a decline in 2010 production and tightening stocks, the March contract opened 20.5 cents higher and settled up 24 cents. Advances were similar for May and July contracts, but trailed down to 11 cents for May and July 2012.
“I think $7.25 to $7.50 for corn looks very feasible” as an upside projection, said Peter Georgantones, Abbot Futures, in a Minneapolis Grain Exchange conference call after USDA released its reports and before markets opened.
USDA reduced its estimate of the 2010 average U.S. corn yield by 1.5 bu. to 152.8 bu./acre, and increased harvested area by 183,000 acres to 81.4 million acres. The resulting crop of 12.447 billion bushels is down from last month's estimate of 12.54 billion.
However, USDA still projects total corn demand this marketing year at 13.43 billion bushels after shifting 100 million bushels of demand from feed to ethanol. Projected ending stocks are down to 745 million bushels, or just 5.55% of the year's use. That's the tightest since 1995-96, when the ratio hit 5%. The season-average 1995-96 farm price surged to $3.24 from the prior years' $2.26, and feed and residual use plunged by 15 percent.
Livestock market conditions are much different now than in 1995-96, says Terry Roggensack, partner specializing in grains and livestock at The Hightower Report. In 1995-96, corn prices soared to a peak in May, forcing livestock producers to liquidate breeding stock.
“We're in a totally opposite situation this year,” says Roggensack. “The cattle traders saw the corn number this morning and cattle futures immediately shot to an all-time high for the nearby futures.” In the mid-1990s, traders figured that if corn futures rose the limit, livestock futures would drop the limit. “Cattle traders now see higher corn prices as a reason to buy cattle, because feeders will be more reluctant to put cattle on feed and beef production could slip four to five months out.”
Even though USDA trimmed this year's feed and residual use of corn by 100 million bushels, Roggensack thinks exports will be the first major line of demand to sag under the pressure of higher prices. He says exports already have weakened slightly and Australia will have a huge supply of feed wheat.
USDA's increased estimate of ethanol demand, now up to 4.9 billion bushels for this season, is on track with increases other analysts have expected. Last week ethanol processors used 93.24 million bushels of corn, ahead of the pace of 91.6 million bushels needed to reach USDA's projection, says Roggensack.
Competition for acreage likely will keep support under corn prices. “We're going to buy some acres,” says Georgantones. “It's going to be a crazy year. We have to make a big crop this year or we're in big trouble.”
Beyond the fundamentals, investors are interested in owning agricultural futures and technical indicators are pointing higher, says Roggensack.
“We are approaching or have surpassed all-time highs in a lot of commodity markets,” says Roggensack., and markets that make all-time highs typically gain another 15 to 20 percent before turning lower. Long-term corn charts show very little resistance at $7.65, he says. “If you take out the $7.65 high, technicians--at least the ones we work with-- have $8.555 and $9.18 as the technical objectives after that.”
Despite the bullish talk, analysts advised growers to market carefully.
“When your can lock in the extraordinary return, if you can lock in some of your input costs, and if you can purchase puts that leave you with an extraordinary return, you've got to go ahead and do that. I don't see why you wouldn't do that,”says Roggensack.
And University of Minnesota economist Ed Usset offers a reminder that six months ago, advisory newsletters showed targets of $3 futures and $2.70-2.75 cash corn. He figures growers who have unpriced grain in their bins are making money. “They have to put together an idea to get out of it. Don't wait too long. Markets have a way of turning.”