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The recent rally in corn prices may not last much longer.
The corn market has rallied nearly 60¢ since making a low in mid-January. That break saw a low in spot corn prices below $6, following the negatively construed January USDA Production and Dec. 1 Grain Stocks reports. Since that time, corn has rallied on the back of declining crop prospects in South America and solid near term demand. The rally has been made easier by tight farmer holding of last year’s crop that left end users scrambling for cash supplies that resulted in a basis rally not usually seen this time of the year. The question facing producers is; "How long can this last?" The answer may be seven to 14 more days.
I have long held a spring objective for May corn futures at $6.80-$7.20, and although a rally toward the bottom of this range cannot yet be ruled out, we are simply running out of time. The current stocks to use ratio in corn is almost identical to last year at this time. Meanwhile, May corn was trading nearly 80¢ higher a year ago than it is in 2012. There a few factors that may be responsible for the discount to prices of just a year ago. Last year, the market was aggressively reaching for a price level in which to slow down the amount of corn used to produce ethanol. Similar price rationing has taken place over the last several weeks.
However, due in part to the elimination of the blender’s tax credit from 2011, as well as historically high ethanol stocks, ethanol industry profit margins are squarely in the red. This week’s ethanol data revealed a weekly reduction of some 23,000 BPD, the lowest level since October 2011. There is more rationing that needs to take place, but this week’s decline may be an indication that ethanol producers are slowing production to stretch the supply of any corn hedged below $6 on the break last year and again in January.
Another reason for lower prices this year is reduced fund participation. A year ago the non-commercial trader held long positions in excess of 325,000 contracts. This year those same traders have a total position under 120,000 contracts. Yet another reason for the discount to last year’s price levels is the drag that new crop corn values are having on the market. The worst kept secret in the marketplace is that 94 million planted acres of corn and a 164 trend line yield will result in a doubling of expected carryout stocks and prices potentially $1-$1.50 below current levels. While these assumptions are a long way from reality, they will continue to keep a lid on prices, as we approach the March 30 acreage and stocks reports.
I expect the corn market to stall out near current price levels. Whether we are able to reach the May corn objective of $6.80 may rely on early month fund buying, a bullish USDA supply and demand report, or a soybean rally toward $13.75 that drags corn along for the ride. In any event, I believe that over the next seven to 14 days, producers should look to advance sales for both old and new crop corn. The trade around the March 9 USDA report may provide the best hedging opportunity until adverse weather affects the market.
A year ago, prices were pummeled in early March by the Japanese tsunami. Yet it was a market that was already overdue for a correction. Prices dropped sharply into the middle of the month before retracing half of that break, leading up to the stocks and acreage report. The corn market was saved last spring by a very bullish stocks report. I expect a retracement of the recent gains leading up to the March 30 stocks and acreage reports. The last three stocks reports lead to limit down trades in the corn market. The skepticism and grumbling has grown over that time. As a producer, you can reduce the impact of the March 30 reports by being proactive with your marketing early this month.