Wednesday, February 9, 2011

Here We Corn Again as USDA Says Stocks Hit 15 Year Lows

At this point I am just going to start cutting and pasting all my 2008 posts about food inflation - they are almost all repeating in identical fashion.  [Apr 3, 2008: Corn Hits $6, Start Stocking Up on Soda Pop]  Only edit I have to do is I was stressing about $6 corn in 08, now we are about to touch $7. 

Partly due to "super cool ethanol" (fully subsidized by you) corn stock in the US is down to a 15 year low.  On the plus side, the Mercedes and BMW lots in Des Moines, Sioux Falls, and Omaha should be extremely busy in the months and years ahead.

Via WSJ:

  • Federal forecasters predict U.S. corn supplies will match lows not seen in 15 years as strong demand from ethanol producers raise new concerns about low global grain supplies.  
  • The U.S. Department of Agriculture in its monthly crop report made a larger-than-expected cut of more than 9% to an estimated 675 million bushels of domestic corn supplies as of Aug. 31, causing futures to surge to more than 2½-year highs Wednesday. 
  • The USDA mostly left wheat- and soybean-supply estimates unchanged, yet futures climbed on concerns that world grains supplies are precariously low.  (this is sort of a funny line, because as we know by now prices no longer react to supply and demand - no matter what the USDA said about wheat and soybeans, prices can only go up!)
  • Agricultural commodities have boomed since last summer, reaching their highest levels since a record-setting rally in 2008. Food prices have followed, with the United Nations Food and Agriculture Organization food-price index hitting a record high in January.
  • The USDA's projections put corn supplies as a percentage of usage at 5%, identical to the level 15 years ago. That is the ratio of supplies at the end of the crop year against how much corn would be used in a year. Supplies as a percentage of usage have fallen below 10% in only four years since 1960, Mr. Norton said.
  • The USDA's forecast of reduced corn supplies was due mainly to higher-than-expected ethanol usage. Domestic production of ethanol in the U.S. is at record levels, with exports of the corn-based fuel additive tripling in the last year. The USDA projects 4.95 billion bushels of corn will go to ethanol production in the current crop year, about 40% of the domestic harvest.
  • Wednesday's report could reignite the debate over whether arable land should be used to grow crops for fuel rather than food, particularly as the export boom undercuts arguments that ethanol makes the U.S. more independent of foreign oil imports.
  • Escalating global demand, a weak dollar and record domestic production are giving U.S. ethanol makers an edge.  U.S. ethanol production ramped up over the last decade amid government policies started under President George W. Bush to rely more heavily on biofuels than imported oil. The U.S. has in recent months raised the amount of ethanol that can be blended into fuel to 15% for cars built during the past decade, up from 10%, and Congress last year extended a 45-cent tax credit that gasoline producers get for every gallon of ethanol they blend into fuel.
  • "We have long argued that demand needs to be rationed in this supply constrained environment—and continue to believe that corn will need to trade to at least $8 [a bushel] to ration ethanol demand," analysts at Morgan Stanley wrote in a note to clients Wednesday.
  • Further pressure on corn supplies could come later in the year if exports pick up, with some analysts contending the USDA is underestimating export demand particularly if China starts buying from the U.S.
  • Supplies of other agricultural commodities, particularly soybeans, are tight as well. The USDA left its U.S. soybean-supply projection unchanged at 140 million bushels. Analysts had been expecting a modest decline, down to 135 million.
  • U.S. wheat supplies also remained unchanged, with the government projecting ending stocks of 818 million bushels. Analysts were forecasting 810 million.
  • Corn for March delivery at the Chicago Board of Trade was up 3.3% to $6.962 a bushel.

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