What a difference two weeks makes in the ag commodities markets. In the last column we were discussing how high the corn acreage was and the re-adjustment upward of the corn stocks by some 300 million bushels. On the July 12, USDA's WASDE report adjusted US corn carry out to 880 million bushels, up from their June estimate, but lower that the estimate implied in the June 30 production report. It is fair to assume that the domestic corn supply number is anyone's guess.
It is apparent that the price of corn has not yet appreciated to the point where demand has been rationed. Granted the price of ethanol has appreciated along with corn, and also gained momentum due to the impending repeal of the VEETC. Petroleum and gasoline have placed a floor under these markets where corn demand rationing has not yet occurred. The other glaring factor in this corn market is the weakness in the dollar which, along with tight supplies globally, has allowed foreign interests to purchase corn at economical levels.
US corn has also had some help from the appreciating sugar market due to reduced harvest supply in Brazil. Additionally, strength in the Brazilian Real has helped this appreciation, which has spilled over into the Brazilian ethanol market and made it difficult for them to export ethanol. It should be noted that ethanol values are at a 37 month high. Brazil is also entertaining reducing the mandated domestic blend of 25% ethanol to 18% ethanol, to curb ethanol consumption and inflation due to higher energy prices.
As stated earlier, much of the strong ag prices can be attributed to tightening supplies. Further uncertainty due to the inability of Congress to act on the debt ceiling and general budget deficit pressures the dollar, even in the face of an economically distressed Eurozone. China will be the other contributing factor in this game as much of their currency reserves are held in dollars. Depreciation of the dollar in the eyes of the Chinese will not be taken lightly.
The December corn futures have rallied nearly $1.15 off of their post report lows to chart a high of $7.03 on 7-19-11. Major resistance is seen at the $7.22 level. If you have an opportunity to market corn above $7.00, it may not be a bad idea to lay off that risk in the face of world economic conditions that are less than stable.
Ethanol Outlook
Margins in the ethanol industry are wide ranging and are greatly reliant on the ethanol plants local supply of corn and the basis levels at which it takes to procure feedstock. In the Eastern Corn Belt, reports of extremely high basis levels are common place. That said margins in the spot market are running between $0.15 and $0.25/gallon.
Blenders are also bidding further out for ethanol. They see the tight corn supplies and many are making offers for the fourth quarter and even into the first quarter of 2012. As long as the RFS and RFS2 are in place, VEETC's repeal should not have much impact on the ethanol industry. If the mandate requires the US blend over 13 billion gallons of ethanol domestically, a floor will be given to the ethanol industry to stand on.
Agriculture and ag processing are now, more than ever, worldwide businesses. What happens in Iowa does affect the corn situation in Korea. What the wheat supply in Australia is affects the price picked up in the Ukraine. Those axioms have always been true.
With the global financial concerns of the past 3 years, the impacts of commodity shortages coupled with the financial uncertainties, have magnified the risk we all take in agribusiness. That said, even in the face of burgeoning corn prices, the ethanol market can function given adequate values in oil, gasoline, blending rates, and overall corn supply.
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