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Corn Demand Alive and Well

After pushing $8.00 in the summer of 2012, there was concern that demand destruction would have long-term implications for corn prices. It would take years to build demand that was demolished in a matter of months. This concern was overblown. Activity has shown again that low prices do cure low prices, just as high prices will cure high prices.

The quarterly stocks report surprised many by indicating over 100 million bushels less in storage than anticipated. For most of the last five months, many analysts believed that prior reports' feed usage was overstated, and a higher stocks figure on March 31 would confirm this belief. That wasn't the case.

As of the writing of this Perspective, export sales for the year have totaled 1.627 billion bushels. The USDA projection for the year is 1.625 billion. Obviously, either cancellations need to occur, or any sales beyond this date could be reflected in a lower carryout number. The current carryout for the 2013/14 crop is 1.456 billion. Just months ago, many were anticipating carryout to be 2 billion or larger. Since January, the trend of carryout has been on the decline, and corn prices have been on the increase.

With the benefit of hindsight, the rally in 2012 was predicated on a significantly short crop expectation. While the crop was smaller at a yield of 123 bushels per acre (early estimates were 166), this was still probably better than most expected. As prices rallied, the USDA slashed demand in a dramatic fashion on all fronts: feed usage, ethanol usage, and exports. World demand was bruised as exports dropped to a 20-year low of 750 million bushels. Along came 2013, and we saw farmers grow a record crop. Prices dropped from $8 to $4. This has spurred strong demand, and all three sectors (feed, exports, and corn for ethanol) are currently humming along with stronger-than-expected usage.

In the end, it simply implies that when prices move higher, producers figure out ways to increase production, and buyers look for alternatives or cut back usage. When prices drop, the opposite is true. Demand has a tendency to grow. Margins are in the black for livestock and ethanol. There's little reason to expect these two sectors to discontinue to grow their use of corn in the year ahead. In addition, export activity continues to show strong signs of life as the world continues to look for ways to increase livestock production and will look to the U.S. to supply its needs.

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