Corn market analysts point to potential for stocks to build

By Sara Wyant

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, February 15, 2012 -An increasing number of corn market-watchers are sounding the alarm about a potential price-depressing stocks buildup by this fall. They cite USDA forecasts for a slowdown in U.S. corn demand from the ethanol sector - the driving force behind the corn market's five-year bull run - and private surveys suggesting that growers will plant a record number of acres this spring.

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“2012 is a very dangerous year for a lot of farmers if they don't manage their margins,” Al Kluis, president and managing partner of Kluis Commodities, told Agri-Pulse during a conference call hosted by the Minneapolis Grain Exchange following the release of USDA's February Supply-Demand report.

“If we end up planting 94 million acres of corn and come in with trend line yield of 160, 161 bushels per acre, we could easily bump the projected ending stocks of corn to over 2 billion bushels by a year from now,” and push the December futures contract under $5 per bushel, said Kluis, who gave a 60%-70% probability of such a scenario unfolding.

In its latest monthly report, USDA projected surplus stocks of corn for the marketing year that ended on Aug. 30, 2011 at a historically tight 801 million bushels, down 45 million from the January outlook and more than 300 million less than the 2010 carryout.

Traders have become accustomed to annual U.S. harvests of 12.5-13 billion bushels, but what makes this year different is that the ethanol engine appears to be running out of steam. The days of 300-500 million-bushel-a-year growth in corn use for ethanol are over because manufacturers of the fuel are nearing the 15 billion gallon cap on corn ethanol established by the Renewable Fuels Standard, John Anderson, senior economist at the American Farm Bureau Federation, said at an agribusiness conference at Arkansas State University last week. The ethanol industry is forecast to consume 5 billion bushels of corn in 2011/12, only slightly less than the previous year but 400 million bushels less than 2009/10.

Anderson foresees the possibility of a “rapid” increase in corn stocks and asserted that more downside risk is being built into futures prices “than we've seen in several years.”

Kluis' downside target for the December contract is $4.80, below most farmers cost of production yet still well above the $2.63 per bushel government target price for corn necessary to trigger a counter-cyclical payment.

“If we ever triggered a counter-cyclical payment today - particularly in corn and wheat - it would be cataclysmic,” said Bush-era USDA Deputy Secretary Chuck Conner, who also spoke at the ASU conference.  “Those levels are just prices that would bring about massive bankruptcies across agriculture.”


Original story printed in February 15, 2012 Agri-Pulse Newsletter.

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