Some recent sales of corn to China, along with a widening gap between the price of oil and ethanol, is helping fuel more demand for corn, University of Illinois economist Darrel Good says.
December 2010 corn futures traded to a high of $3.95 in mid-April, retreated to a low of $3.67 early last week, and then rallied back to $3.95. The current price is about 40 cents above the contract low established in early September 2009 and about 75 cents below the high reached in early June 2009. The contract high, reached in mid-2008, is more than $7.00.
Good says that weakness in corn prices starting in mid-April primarily reflected supply considerations: generally favorable weather for planting, expectations that acreage could exceed March intention and expectations that the 2010 yield would be above trend value due to a majority of the crop being planted early.
"The current strength in corn prices reflects more favorable demand prospects," Good says. "There is a fair amount of optimism about corn demand in each of the three major categories of consumption."
According to the ag economist, recent data confirm increasing production and consumption of ethanol. Expansion is being driven by extremely favorable ethanol blending margins.
"Wholesale gasoline prices have increased from about $2 per gallon in mid-February to over $2.40 now. During the same time period, ethanol prices have declined from about $1.75 per gallon to about $1.60 per gallon," Good says. "The current spread between gasoline and ethanol prices results in a very high return to ethanol blending, even before the 45-cent-per-gallon blender’s tax credit.
"The price spread is large enough that E-85 prices could be competitive at the retail level."
Good adds that favorable blending margins should continue to support demand for ethanol so that corn consumption for ethanol production during the 2009-10 corn marketing year could exceed the current USDA projection of 4.3 billion bushels. He says there is ongoing concern about the “blend wall” for ethanol if midlevel blends are limited to 10%, but that wall clearly has not been reached, yet.
The recent increase in hog and cattle prices has also triggered ideas that feed and residual use of corn during the current marketing year might exceed earlier expectations, Good says. Even with a decline in the feed and residual use of sorghum and another summer of relatively low feeding rates for wheat, however, feed and residual use of corn above the current USDA projection appears unlikely, he says.
Good says improving corn export prospects have provided most of the recent optimism about corn demand. The release of some corn from domestic reserves in China, along with the issuance of import licenses a few weeks ago, has been followed by some small purchases of U.S. corn.
China has not imported significant quantities of corn since 2001-02 (40 million bushels). The last year of large imports was 1994-95 (170 million bushels).
"The magnitude of U.S. corn imports by China this year is very uncertain, but recent purchases come at a time when overall sales of U.S. corn have been increasing," Good says. "The USDA weekly reports indicate that new export sales averaged 50 million bushels per week for the 4 weeks ended April 22, compared to an average of 28 million per week in the previous 10 weeks."
Good says new sales need to average 38 million per week from now through August in order for sales to reach the USDA’s 1.9 billion bushel export projection. Weekly shipments averaged 38.2 million bushels per week during the 7 weeks ended April 29. To reach 1.9 billion for the year, shipments from now through August need to average about 38.8 million bushels per week.
"The tug of war between improving demand prospects and expectations for a large crop in 2010 will likely continue, resulting in a continued wide trading range for corn prices," Good says. "Stronger demand, however, increases the importance of crop size.
"If improved demand is confirmed, there may be less downside price risk and an opportunity for a move back to recent highs if crop problems develop."