Monday, December 15, 2008

Corn end stocks rise in wake of reduced demand for ethanol

Grain markets continued to play the same tune for most of last week, rising and falling with the fortunes of global equity markets. Markets shrugged off a bearish USDA report as outside markets pulled rank on hopes that a bailout plan for the US car industry would be approved. But when this failed to gain support prices fell, corn recovered somewhat on ‘shocking’ US planting estimates; with demand backpedaling, the short-term price path looks far from certain, even with a sharp reduction in plantings.

In its reports released Thursday night, USDA slashed corn for ethanol demand and corn exports which contributed to another lift in end stock projections. The USDA put ethanol use 300 million bushels lower as prospects for blending above federally mandated levels decline. Financial problems for ethanol producers are reducing plant capacity utilization for existing plants and delaying plant openings for those facilities still under construction. Falling gasoline prices have also resulted in high relative prices for ethanol, reducing blender incentives.

The net result is the USDA expects US corn stocks to be comfortable than initial estimates at 1,474 million bu, down from this summer's 1,624 million bu carry in. If ethanol demand does not improve, US may not need to increase corn area much in 2009.

One reason ethanol use is expected to decline is that its price is no longer competitive with gasoline. In July and August, the January ethanol futures contract averaged 77% of the value of the January gasoline futures contract. In November it averaged 133% and so far this month it has averaged 151% of the price of gasoline. While US government mandates require that a certain percentage of ethanol be blended with gasoline, the higher the price of ethanol, the greater the incentive to circumvent the mandates. In addition, overall energy consumption is falling as part of efforts by consumers to reduce spending to help reduce personal debt.

US ProFarmer reported that some in the industry feel USDA’s downwardly revised corn-for-ethanol usage estimate of 3.7 billion bu is still too high. USDA now sees corn exports in the current marketing year at 1.8 billion bu. – down a whopping 636 million bu. from 2007-08. Like with the corn-for-ethanol figure, some industry insiders feel the export figure is still too high as global financial woes, plentiful world feed wheat supplies and a stronger dollar threaten to reduce usage of US corn. So, while USDA upped corn carryover more than expected this month, additional decreases in usage and increased carryover may lie ahead.

The USDA also reduced the soybean crush owing to weak soymeal demand as a result of declining feed demand in Nth America, and competition from canola meal. With a lift in the North American canola crush – estimates are that it will expand by 950,000t in 08/09 with the majority of the additional canola meal (575,000t) being absorbed within the US market. The soymeal export market will be a major challenge for balance in 08/09.

For the first time in many weeks on Friday grains markets reacted to some fundamentals news with corn gaining support on indications of a cutback in US plantings in the coming year. It looks like it will be a race to see which falls quicker demand or supply. Certainly, the pressure on plantings is not as great as it looked to be early in the year and beans now seem to be clearly leading the race in the early going.

In the near-term, grains need some help. Ongoing dryness across Sth America (Argentina and southern Brazil) could be one source, while $US weakness may be another. Worsening US economic data and a widening trade deficit has seen the $US’s gains stagnate. Better interest rates across Europe and more action from EU authorities has seen the Euro gain. Although it is early day’s to declare a trend, $US weakness could help arrest recent slumps in commodity prices.

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