Ray Grabanski: Chief Economist Collins: Need >13.5 million acres corn?
Since last Wednesday, the corn market has rallied over 60c from Wednesday's lows as Chief Economist Collins testified to the Senate Ag Committee about the biofuels impacts on grains/agriculture. Prior to the Friday USDA report, Collins said we were 7 million acres short in 2006 of the corn demand (planted 78.6 million, needed 85.6 million), and with the drop in acreage/yield in Friday's report, that actually is closer to 8 million short today.
Then Collins added that "its quite likely, based on current ethanol plant construction, that corn used in ethanol production will rise by more than 1 bilion bu from the 2.15 billion bu of the 2006 corn crop expected to be used for ethanol. Use of 1 billion bu, at a trend yield of 152 bu/acre, would require an additional 6.5 million acres of corn, if corn consumed in other uses remains unchanged from this year's projected levels." He basically justified the rapid rise in corn prices to try to attract the 13-15 million acres needed for the coming year's corn needs. Yes, I said 13-15 MILLION ACRES, not 8 million as many are talking about. This is up considerably even from our big numbers of 12 million acres just a few months ago. Why? Simply due to the continued rapid construction of ethanol plants over the past 4 months. Where will these acres come from?
Friday's powerful trade could find some follow through strength as people are beginning to realize the almost impossible situation in corn. Chief USDA Economist Collins Wednesday testimony got the market going with the news that we needed an estimated 13.5 million more corn acres in 2007 with a 152 bu trend yield to keep from losing more carryout. Then Friday USDA dropped the 2007 beginning stocks another 180 mb (which should add another million acres to the mix). It seems almost impossible for corn to add 13-15 million acres in just one year, so the market had no choice but to go sharply higher. With no cuts in 2006/07 demand, strong exports, building ethanol plants at a pace to process an additional 1 billion bu/corn/year (or 10% more demand) and it just adds up to an impossible situation. How long can we continue to add ethanol capacity for 1 billion bu additional corn use/year? The answer the market is telling us is "Not long!".
To take 14 million acres from other crops in 2007, and then continue to take another 6.5 million acres from other crops to add to corn in each subsequent year in 2008 forward is virtually an impossible task. Yet, the current pace of ethanol plant construction would require at least that commitment (and actually getting bigger, not smaller, each passing month). So the market is left to deal with a â€˜farce' in the corn which market participants have created (mostly ethanol construction). Is it any wonder that corn was up 60+ cents in 3 days last week? And beans and wheat following along?
Last week included a huge weekly upside reversal on daily charts that should find lots of follow through strength in the coming weeks. It looks like not only is the 'correction' over starting the new year, but also the upside potential of the market is getting very large as there is very little upside resistance left in the marketplace. Once corn broke $4, the only real upside resistance left is the 1996 summer high around $5.50, still a good $1.30 away or more. With today's market situation, actually it is probably even more bullish than the simple one year supply problem of 1996, whereas it looks like we may have multiple year problems in this demand led bull market.