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Demand- or supply-driven?

08/26/2011 @ 2:49pm

Over the last ten years as the world has changed, so has demand. Increased migration of 50,000,000 to 100,000,000 people a year from third world status to middle class is helping to provide for an undercurrent of demand that the world has never seen.

So while demand is the backdrop of higher commodity prices, it's really the supply picture that has changed the fortunes for the corn market over the last 60 to 90 days.

Let's look at some of the variables. What you'll see is that many of the demand factors with corn are relatively unchanged over the last two to three months. However, what has changed is the projected crop.

Expectations for yield near 164 bushels per acre early in the season have now dwindled to somewhere probably close to 152 bushels. Using those figures and simplifying harvested acres down to 80,000,000 is a reduction of 960,000,000 bushels.

For practicality purposes we'll round and say the crop is 1 billion bushels less than maybe what it could have been. With a current carryout of 700 million bushels, that 1 billion bushels could have brought the carryout to 1.5 or 1.8 billion. This would very likely have corn futures trading sub-par at the $5.00 level.

End user buying would be less than aggressive anticipating a big harvest. Speculative interest would probably be uneventful, waiting for better signs of a bottom this fall.

When breaking down Supply and Demand reports in the USDA, we will compare this year's demand to last year's. The total figure for demand, or that is corn use, is 13.160 billion bushels, as compared to last year's figure at this same time at 13.245 billion.

Feed usage is down 100 million bushels at 4.9 billion, while ethanol is slightly higher at 5.1 billion versus 5.020 billion a year ago. Food, seed and industrial uses are mostly unchanged. Exports are now estimated at 1.750 billion bushels compared to 1.825 billion last year.

As you can see, total usage is down and suggests that prices should not move higher based on demand alone. Yet, it's the supply that counts, and with expectations that this crop could yet shrink, the market continues to trend upward.

Recent history would then suggest that the market finds plenty of demand at lower levels. This will keep prices from diminishing much in the year ahead as end users recognize that tight inventory could mean limited downside for price. For now, however, if a rally in corn were to continue, it would likely come on the heels of expectations for an even smaller crop.


If you have questions or comments please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.

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