Let the corn rationing begin

Let the corn rationing begin

By: Jeff Caldwell 08/11/2011 @ 8:04am

With its 153-bushel-per-acre yield guess for this year's crop and lower usage data for both old- and new-crop corn, USDA sent a clear signal Thursday morning that it is time to ration. And, that means only one thing for corn prices moving forward.

"The pipeline minimum is 700 million bushels, so in order to keep it there, the price is going to have to ration. We're going to have to go high enough," says U.S. Commodities trader and market analyst Don Roose. "We're already starting at higher prices, so how much higher will we go? That's what we're going to watch."

The summer heat has taken a major toll on the Corn Belt crop, and as that's already bolstered prices, rationing in the form of slowed usage for old crop corn has already begun, Roose adds. That will have to continue if supplies are maintained in the face of an expected shortened crop.

"I think probably the most important thing the government did is send a clear signal that our supplies are low enough that we're going to have to move into a rationing state," Roose says. "We've been to $8 before. But, do we slow down demand? Certainly on old crop, these high prices are slowing usage, but this report says that's going to continue." 

But, what price is it going to take to encourage the rationing that Roose says is now inevitable? It's fairly easy to see $8 corn in the near term, sure, but when will the rally reach the point where rationing will turn into an all-out demand shutdown?"This was not the year for crop production to have a hiccup," says Agriculture.com Marketing Talk member steeringwheelholder after noting his crop is filled with "small ears and big ears that aborted the last 1/3 near the tip."$10 corn is in our future."Adds Michigan farmer Daniel Feldkamp: "The ethanol plant here was offering $8/bushel contracts a couple weeks ago. They did that in fear of not having enough corn to process. So, yes, it could get to $10 soon."But, prices in the $10 range may do more than curtail demand. They may end it altogether as processors and end-users balk at prices they can't justify down the pipeline. If it's not profitable for users, the market won't be able to sustain prices in that range, says Marketing Talk member animalfeeder."There is no way corn will hit $10.00. Livestock/poultry will pull the plug way before that, I say in the $7.50 to $8.50 area," animalfeeder says. "Ethanol can't afford to pay $10.00 even with the subsidy and mandate. We go to $10.00 and you will see major demand destruction and you will be back to $3.00 next year beacause there will not be an buyers out there."

Still, there are 2 major outside variables looming heavily on the market that could push prices to double-digit levels, others say. First, if the economic deterioration continues, recession returns and investors look to commodities as a safehouse from the stock market, that could be another jet of bullish energy for the corn trade.

"I'm not for sure if the system will tolerate $10 corn. But, with oil under $95 and the stock market slipping, I guess time will tell," says Marketing Talk member highyields. "The only thing that might happen is inflationary fears, and buy commodities comes back in style."

Then, there's China. That nation's been buying increasing amounts of U.S. grain recently, and some suspect that could continue even if prices head sharply higher. "The only place that might pay above $8 is China. I'm not saying that corn will go to $10...I doubt if it will make a run back at $8, at least on the board," highyields adds. "The futures market takes money to make that move, and I sense the public traders want to own cash, a 'no risk' investment."