Corn is always the talk of the coffee shop, but now it's becoming the talk of the world. Five years ago who would have thought corn would get so much attention? The areas in which corn is capturing a lot of interest are:
- Ethanol production
- Commodity and index fund buying
- Triple stack varieties
The first two areas are obviously market oriented while the third concerns production. The key question among analysts is whether or not the increases in yield as a result of the new triple stack varieties (rootworm and drought resistant) are keeping pace with, exceeding or falling behind the increased demand for corn from the increased usage for ethanol and the aggressive buying by index funds.
Even though it is a political football, the home team (farmers) is winning this game. And this is not just a game. This is very serious business. The chart below shows clearly the changing statistics of corn for ethanol. Only five years ago the amount of corn used by ethanol plants barely exceeded 500 million bushels. This year trade estimates peg corn usage for ethanol at 1.60 billion bushels and our estimate for next year with current ethanol plants under construction is that 1.975 billion bushels will be crushed for ethanol. That compares to this years' exports of 1.85 billion.
By next year, more corn will be processed at ethanol plants in the U.S. than will be exported out of this country. That's tremendous news for corn producers because ethanol is permanent demand — exports can come and go.
Remember, there is a big difference between commodity funds and commodity index funds.
Commodity funds trade both long and short, while index funds only maintain net long positions. Their influence in the short term is tremendous. Open interest (the number of contracts outstanding) is now running more than 1 million contracts in corn. In 2003 that number was approximately 500,000 contracts and in the late 1990s was averaging about 400,000 contracts. This market has more players with a bullish bias.
Ironically, many of your neighbors in the coffee shop several years ago did nothing but swear about commodity funds and their influence in the market. Now that they are helping the market go higher, those same people have gone numb. But a note of caution — money in these funds can be fleeting. Just as it has easily come into the market, if the market were to go through a long-term bear market, it will leave just as quickly. This can still turn out to be a double-edged sword.
It's an exciting time to be a corn producer. Many things are happening and almost all of them are positive. It's fun to combine corn when more than 200 bu./acre are pouring into the hopper and the average price is more than $2/bu. not counting LDPs, countercyclical or direct payments.
But while everyone is enamored with the bullish news from commodity index funds and ethanol plants, farms still need to cash flow on a year to year basis, so don't forget to sell the crop.
Do Fundamentals Matter?
In the long term the fundamentals will still determine the average price of corn.
It's very important in a market such as this to differentiate fundamentals that impact a market long term versus short term (this year). Commodity and index funds are a short-term influence. Ethanol is a long-term influence. While I'm not going to go into an extended dissertation on the advantages of triple stack seed varieties, (you people know more about that than I do) thus far the increases in yield as a result of these genetic improvements is more than offsetting the increased usage from ethanol plants.
Producers still have a huge mound of corn to get rid of this year. We expect carryover supplies to exceed 2.3 billion this year and 2 billion next year, which compares to the 2004-05 carryover of 2.1 billion and the 2003-04 carryover of 958 million. This still translates to an average cash price at the farm near $2/bu.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.