THE CURRENT DYNAMICS OF CORN

Corn futures have been in sharp decline in recent sessions as lower demand has been amplified by improving USDA crop reports for this harvest. September Contracts have been below 3.20 in today’s session –down 21% YTD.

 

THE CURRENT DYNAMICS OF CORN - CORN

 

This price action reflects a converging set of factors:

 

CORN SUPPLY - The USDA recently updated its crop forecast and is now calling for a near-record U.S. corn harvest this fall.  This is happening at a time when the global economy and other factors have reduced the need for corn, creating a potential supply imbalance.  The USDA forecasts the corn crop will be 12.8 billion bushels, just slightly lower than the 2007 record crop of 13 billion bushels.  The large crop is projected in a year when the number of acres planted is down: 6.5 million fewer acres in the U.S. than in 2007. This year's crop continues to benefit from improved seeds and an ideal growing season for much of the Corn Belt.



CORN DEMAND - In 2009, corn exports for this year's first six months were down 40%.  While the BURNING BUCK could help to boost the export picture, uncertainty prevails.  Gas prices have started to move higher, and thus one could expect the ethanol producers to see increased need for corn, but I’m not convinced.  The economics of ethanol never made sense, and there is less capital chasing the business; as a result, we are unlikely to see a repeat of 2007.  Approximately half of the corn produced in the U.S. is used for animal feed.  Due to last year’s spike in corn prices and the slowing economy, there are fewer animals out there to feed, so the need for corn is less.

 

THE CURRENT DYNAMICS OF CORN - corn exports

 

WHO BENEFITS, WHO DOES NOT?

ADM and BG grow corn and as such are hurt from lower corn prices as their crops command lower prices on the market.

MTC and D produce corn seed and they stand to feel the pinch if farmers buy less corn seed.  Additionally, improved seeds allow farmers to get bigger yields per acre, suggesting the need to buy fewer seeds.

 

POT and MOS may see less business from farmers if they use less fertilizer on their crops.

Consumer staple companies will benefit.  Food, Beverage and the meat processing industry will benefit from lower ingredient costs.  The Restaurant industry will continue to be the beneficiary of benign food cost trends.     

 

 

Howard Penney

Managing Director


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