The Minefield for Corn Demand Over $5

$5 CornI cringed last week when I read the front page of the popular regional farm newspaper I write for in southern Ontario with the headline, which said corn was going to $6 a bushel.  At first glance I had to take a double take to make sure I had not said that and thankfully I hadn’t.  I know the analyst that made that prediction and we’ll see how close he comes.  There has been a great tendency among some in the media to get $6 futures values mixed up with $6 cash price over the last few weeks.  Something tells me there might’ve been a mix-up on that one.

It just so happens that the December 2010 corn futures contract retreated below $5 today.  So predictors of the $6 hurdle broke through a psychological level the wrong way.  Of course I have no idea what is going to happen but it’s been pretty clear over the last few weeks as corn has made its run up, end users weren’t going to pay those prices.  They knew they didn’t have to and negative basis levels reflected that.  With the futures carry weakening in the December to March spread something tells me demand is dropping.  With the non-commercials holding record contract amounts if they decide to give back it will be with a fury.  Needless to say, there are some strong individuals out there who believe $6 dollar cash corn is coming.

Interestingly enough, in Ontario with a minus $.85 basis under the December futures we are perilously close to $3 plus corn.  So if we are going to hit the $6 mark, it is going to take a major attitude adjustment among Ontario end-users.  It’ll also probably have to wait until the April May period of 2011.  If we do get there, I wonder how many buyers will see on the other side of $6.

Much has been written about the great run-up in corn since June 29th.  For instance on June 29th corn closed at $3.44 a bushel.  On September 20th December corn reached a high of $5.23 a bushel.  It has been an impressive run-up but as corn has risen, there has been much talk among the corn chattering classes comparing this to the great price move of 2008.  The ending to that story wasn’t very pretty, the price of corn got so high that demand dropped off and some of it was killed off, never to be seen again.  Over the last few months as corn has shot over $5/bu on the futures market I have wondered if history is going to repeat itself.

It brings up a little bit of “heresy”.  For instance, did $5, $6 and $7 cash corn really do us any good in 2008?  It sure boosted the gross revenue but MAP prices went to $1500 a ton within six months.  It all came crashing down with our Lehman Brothers friends, so in many ways looking back at the time is somewhat skewed.  Despite that, in 2010 my feelings are that the dynamic demand for corn cannot be and will not be sustained at five dollars futures values and above.

Of course this year it looks like despite the wonderful start in the spring to the US corn crop yields are down.  It was only back in August that the USDA said the US corn crop would be 165 bushels per acre.  The October report will come out October 8 and many are expecting a reduction, in fact many private analysts are now zeroing in on a yield figure of 159 bushels per acre putting the crop at sub 13 billion bushels.  This to a large extent is the biggest factor in sending corn higher.

In Canada, there is an obvious factor, which could easily push corn prices over $6 cash.  The Loonie finished at 96.71 cents US today a far cry away from the $1.05 predicted by some analysts this past spring.  I read one report today that a large Swiss bank was predicting the loonie would be $1.05 by this time next year while the Canadian Imperial Bank of Commerce says it’s going to drop to $.92 US by March 2011.   Both can’t be right, so if the dollar goes down to $.78 where it was in March of 2009, then we might see $6 corn.

This is all taking place in a world where feed grains have been constricted by the problems in Russia. It is also entirely obvious that with the stocks to use ratio at 8.3%, pipeline stocks of corn have the potential to be compromised in the spring and summer of 2011.  So sure, there could be corn price fireworks like the Fourth of July, but what I’m saying is you might have to wait till then.

Of course the trap door slowly opening under all of this will be the “killing of demand” at those price levels.  There is nothing like cheap to keep end-users happy.  Just ask the potash producers what happened to demand when you stop buying it at $1200/tonne.  Our price, demand, supply relationships always balance on the weakest link.  Yes, corn prices have limits.  Let’s keep that in mind as we march into the minefield of corn demand over $5 plus.