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Rich Nelson: Little USDA changes seen

12/03/2010 @ 3:22pm

Fundamental Support: Corn this week rose 20 1/2 cents. Big support came from the rocketing wheat market, further talk that China needs to import corn next year, and partially from Argentine corn concerns. Looking ahead to next week, we do not look for a major change to USDA’s balance sheet. They traditionally wait until January to adjust production numbers. That leaves us arguing about ethanol and exports. We will release our numbers on Monday.

Life After the Ethanol Subsidy: This morning we were asked by Reuters newswire a question regarding the subsidy. “What price impact would be seen if ethanol subsidies were not renewed?” Unless Congress takes action, the 45 cent per gallon blender credit and 54 cent per gallon import tariff will end. We told the reporter it would imply a 15 cent per gallon drop in ethanol and a 35 cent impact on corn prices. That equates to a 7% loss in ethanol and a 6% decline in corn. The story also quoted one university based economist, not one of the well known ones, as saying there would be a 6% drop in ethanol and a 7% loss in corn. It is no coincidence that our number was close to his. This individual is one of the few in the industry to actually do the work in mapping out ethanol’s effort on corn pricing. His early work was instrumental in fine tuning our pricing models. What was interesting here is regular corn market analysts told the reporter they were looking for a 10% to 20% drop in corn. Off today’s close that would imply a 57 to 115 cent decline! So you have people who have done the work suggesting a 6% or 7% decline versus industry expectations of 10% to 20%. There will be an impact on production but not as much as you would think.

Realistic Impact: Though much of the grain analyst community discusses a large 10% to 15% drop in ethanol production if subsidies were not enacted we cannot join that thought. The Department of Energy is expecting 2011 ethanol production at 14.2 billion gallons. That forecast was made assuming subsidies. We cannot argue with those numbers. That represents a 13% increase over the minimum Federal Mandate level of 12.0. In essence the grain analyst community believes we will fall directly down to the minimum mandate level? The university source we noted above believes a 5% loss would happen. We will be close to that with a 7% lower expectation. 7% lower would represent 931 million gallons. There is still some confusion over how much corn goes into ethanol production. USDA’s ERS group suggests nationwide efficiency from June through August was 2.73 gallons per bushel. Using that level, which is pretty darn conservative, implies a 341 million bushel swing in corn for ethanol in calendar 2011. This is a big number but is only one of the many drivers for price. Did you know beginning stocks for 2011 will be 880 million smaller than 2010? 

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