The key support for grain markets this year, the price of corn, has dropped about 25 percent from its mid June peak when supply shortage fears were eased.
Dry weather threatening production in the eastern corn belt was relieved by rain. Also, the U.S. Department of Agriculture June seeding survey said American farmers had sown 92.9 million acres to corn, the most since 1944 and three percent more than they planned in March.
Depending on weather, that could produce a record crop of 12.5 to 13 billion bushels.
The prospect of a big crop might have cooled the rally, but it is good for the long-term health of grain markets.
Read Also
Increasing farmland prices blamed on investors
a major tax and financial services firm says investors are driving up the value of farmland, preventing young farmers from entering the business. Robert Andjelic said that is bullshit.
When corn was more than $4 US per bu., it threatened the profitability of the ethanol industry and reduced the incentive to maintain its rapid expansion.
Current U.S. ethanol production is a little more than 22.7 billion litres. A similar amount of capacity is under construction or on the drawing board, leading to expectations of about 49.2 billion litres of capacity by the end of 2008.
However, analysts had begun speculating that expansion would have to slow because the high corn cost, coupled with fears of a glut of ethanol, would push many in the industry into financial losses.
And that would mean there’d be less pressure to keep corn prices high enough to encourage more corn acreage again next year.
The USDA estimates that U.S. ethanol producers will consume 3.4 billion bu. of corn in 2007-08. That accounts for a little more than 25 percent of the expected corn production this year.
As a rule of thumb, a bushel of corn produces about 10.6 litres of ethanol. Using that measure, the expected 49.2 billion litres of ethanol capacity by the close of 2008 would need 4.6 billion bu. of corn, 35 percent more than in 2007-08.
Now that corn has dropped by $1 per bu. to about $3.30, the ethanol expansion is likely to proceed and spark another price rally into next spring as the market again “buys” corn acres.
The other good news is that the big crop will at least temporarily calm livestock feeders’ nerves and quiet the commotion about high corn prices fueling food price inflation.
The livestock industry’s complaints and widespread worries about inflation could have begun to erode political support for biofuel and that would have been bad for grain markets in the long term.
