While the corn market faces a hefty old crop supply with historically high ending stocks, a look at the new crop season reveals a potentially strong year ahead for corn futures. Demand factors are on the rise, US producers are expected to plant less corn and more soybeans and wheat, soil conditions should start the year in less than ideal condition, fertilizer usage should be down sharply due to high prices, and corn is becoming classified as a food, feed and energy commodity market, which increases the demand base.
In the old days, buyers of corn included small speculators, livestock feeders, grain exporters and trend-following fund traders. Nowadays, on top of the traditional buyers new corn buyers include 1) energy companies that want a hedge against higher gasoline prices, 2) index fund traders who buy and hold corn futures and continue to buy as long as investment funds are moving into commodity indices that include corn, 3) other industrial corn buyers who make plastics, high fructose corn syrup and other products and 4) ethanol producers, whose product costs only $1.00/gallon to produce versus much higher priced gasoline.
A review of the corn supply/demand outlook would suggest that yields might need to be above average in order for production to exceed consumption. The enclosed table shows the projected ending stocks outlook assuming a 2 1/2 million acre loss in harvested acreage and an increase in corn consumption to 11.425 billion bushels. If yield comes in at 146 bu/acre (trendline) then ending stocks could come in near 1.611 billion bushels or about 14% of usage. That would be down sharply from the 2.426 billion ending stocks figure (22.4% of usage) for 2005/06 and would be the third lowest in the past 9 years. If yield happens to come in at 10% below trend, ending stocks projections drop to 551 million bushels with a stocks/usage ratio at an all-time record low of 4.8%.
The enclosed demand estimates are conservative, and many traders would argue that all categories could be higher as livestock numbers are growing quickly, ethanol demand is expanding rapidly, high sugar prices might trigger increased fructose usage, and the potential for plastics made from corn to become very competitive with those produced from petroleum products. Continued drought conditions in the US southern plains and Northern Illinois and ideas that fertilizer and irrigation will decline sharply this year add to the positive tone. Open interest is already at a record high, and index funds are attracted to corn. If speculators, trend-following funds and energy hedgers get more active, there could be plenty of upside potential for December corn before the crop is even planted.
