Monday, April 11, 2011

The Need for Corn Rationing - Apr 11th

The Need for Corn Rationing
April 11th, 2011

Corn has outperformed every other major commodity over the past month, rising over 16.5 percent, and beating even the headline dominating silver market.  This is no speculative bubble, but a manifestation of classic supply and demand.  As discussed in earlier posts (see Grain Outlook from March 22nd), corn demand continues to march higher due to increased ethanol production, as well as sporadic export demand from China.  This has created a very tight supply situation in the United States, where corn is the largest cash crop.

USDA Estimate of Corn Use (Left-axis) and Ending Stocks (Right-axis)
Courtesy of Bloomberg

The most recent USDA supply and demand estimate pegged corn use at a record 13.5 billion bushels, and ending stocks at a mere 675 million bushels.  Even this estimate may prove to be overly optimistic, as the pace of stock depletion races forward in the face of surging prices. 

The chart below shows the depletion of corn stock from January through March over the past couple of decades.  We can see that historically high price of corn has not discouraged usage, which ballooned to a new high, and increased 10.14 percent from the same period last year. 

Stock Depletion in First Quarter – USDA
Courtesy of Bloomberg

This helped push March 31st corn stocks to the lowest level in four years (see chart).

March 31st Corn Stocks – USDA 
Courtesy of Bloomberg

Should the pace of stock depletion continue at this pace, meaning a 10 percent increase over last year from April through September, the market will go into a deficit before the new crop is harvested.  Obviously this is a situation where high prices will be required in order to ration supply.  In order to have ending stocks meet the USDA’s estimate demand must shrink to 2 percent less that last year for the next six months. 

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group

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