Corn and Ethanol Report

Ethanol has become the villain of choice in the media recently as they search for someone or something to blame for higher food prices. This shift in sentiment has started to create some political rumblings. Texas, a large cattle producing state, has already seen their governor seek an exemption from the ethanol mandate. An answer to this request is expected by the end of July. Senator Kay Bailey Hutchison has introduced legislation calling for a freeze in the ethanol mandate level. It is unlikely that we would see any reduction in the ethanol mandate, simply a slowing of the growth.Planting IntentionsThe June 30, 2008 USDA acreage number was a bearish surprise for corn, pushing prices to a limit down close. The acreage number was 1.7 million above the trade estimates at 87.3 million acres. This was a 6.273 million acre decline from the 2006/2007 planting number.The USDA planting number was a big surprise as the market was expecting the heavy rains and flooding would have lead to smaller corn plantings. The corn to soybean ratio has moved back in favor of soybeans following the better prospects for corn production this year.The weather this spring and early summer was too wet and too cold for planting corn. Planting progress this year was the slowest it has been since 1993. The later corn is planted the less likely we will see trend line or above yields. A late planting pushes pollination back into the hottest and driest part of the summer and also leaves the corn plant more susceptible to frost later in the season. The July Supply/Demand report from the USDA raised the corn carryout by more than the trade was expecting. The carryout was increased by 160 million bushels to 833 million bushels. The USDA lowered corn use for ethanol by 100 million bushels citing slower than expected construction of new plants.Corn demand for 2007/2008 fell by 315 million bushels from the April USDA Supply/ Demand to the July numbers. The USDA estimates for 2008/09 demand is 12.495 billion bushels. This number is 600 million bushels below the Outlook Forum estimate in February. We have seen record corn prices this spring and summer which appear to have curbed demand. Ethanol margins have been squeezed as deferred ethanol prices have dropped in spite of record high crude. The livestock industry is suffering as record high corn prices have destroyed profitability. The floods this spring and early summer propelled corn futures to record prices in order to reduce demand what was thought to be 500-700 million bushels in yield loss. Prices appear to have done the job. We have a favorable weather forecast to take us through corn pollination. It appears the last hurdle the crop may face is an early frost. We may see a bounce on a cooler forecast late in the season. Barring a frost, we have likely seen the highs of the season and would expect a pullback to the $5-$6 area. We feel the December 2009 corn versus July 2009 corn spread will move to a carry. Daniels trading expects a long term structural change in the corn market. We expect soybean prices to gain considerably on corn over the next 12 months in order to buy back bean acreage from corn in the US and Brazil.