How High Do Prices Have to go to Ration Usage?
Sep 15, 2010
I was talking to Terry at Hightower about the corn market. He is currently working on the historical impact of a hot dry August on the corn market. We do not have many years to draw from but the impact has been the crop gets smaller rather than larger and we will have the details later this week. I believe it’s safe to say the odds that the October Supply/Demand report will reduce U.S. corn yields is better than 65% right now and growing. This implies carryover will move below 1 billion before the bin doors shut.
Therefore, the question this logically leads to is how high do prices have to get before demand rationing occurs. In regards to China as long as the dollar remains weak and the difference between Chinese prices and transportation is still above U.S. prices they will continue to buy. The most recent data I have still suggests there is a 50 to 60 cent incentive to buy U.S. corn. In regards to ethanol production, the latest statistics suggest the ethanol plants are running at full steam. Therefore, the current $1.4275 rally from the June lows to the current highs is not slowing down anybody.
The number being thrown around is the $5.50 level basis the lead month futures. I do not have any problem with this level. The concern I have is the pattern of short crops/long tails developing. What are we going to do if lead month corn hits these levels between now and early next year? One would assume that an in increase corn acres will be motivated while demand is essentially being rationed. The problem for sellers however will be since its coming so early and concern about a spring or summer drought will be so high I believe selling will be very difficult for everybody.
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