WEEKEND CORN MARKET REVIEW: 2011-02-13

• March corn closed 28 cents higher for the week, December corn 16 ½ cents higher
• The USDA makes dramatic changes to the US Supply-Demand - raises corn usage for ethanol by 50 million bushels, raises corn usage for sweetener by 15 million bushels, raises corn usage for starch by 5 million bushels.
• The USDA makes notable changes on the World Supply/Demand - Lowers the carry-in by 1.95MT, lowers World production by 1.75MT, lowers projected carryout by 4.49MT.
• Old crop US weekly export sales were 1.11MT - Current export sales are 61% of USDA projections for the year
• Old crop US weekly export shipments were 669.1KT - Current export shipments are at 36% of USDA projections for the year.

CORN MARKET		2009-2010		2010-2011
Planted Acres		86.4 million (-0.1)		88.2 million
Acres Harvested		79.5 million (-0.1)		81.4 million (+0.1)
Yield per Acre		164.7 bushels		152.8 bushels (-1.5)
Production		13.092 billion (-0.018)		12.447 billion (-0.093)
Carry In		1.673 billion		1.708 billion
Domestic Usage		11.079 billion (-0.019)		11.550 billion (+70)
Exports		1.987 billion		1.950 billion
Ending US Stocks		1.708 billion		675 million (-70)
World Ending Stocks		145.16 MMT(-1.95)		122.51 MMT(-4.49)

After the USDA reported a 9% reduction in the projected carryout it all now comes down to price rationing and at what price level will slow the demand for U.S. corn.  The driving force continues to be corn for ethanol.  We are beginning to hear reports of several (not many) ethanol plant closures due to poor margins.  We have to think that the plants that have poor margins have run out of the cheaper corn they bought much earlier in the season. With the replacement cost of corn now dramatically higher there margins are suffering.  The plants that are still operating with profits still have an available supply of that cheaper corn.  The corn grind for ethanol has eased some but not enough to indicate a trend change in the demand.  We are told that although the profit margins for ethanol may be slipping the margins for blending ethanol with gasoline remain profitable.  Robust sales of DDG's continue to add too the bottom line for the ethanol producer.   

Many in the trade were surprised that the USDA did not lower corn exports given the slow pace of shipments.  This would suggest that the U.S. export program for corn is "back-end" loaded.   That means U.S. corn shipments should start improving compared to the recent slow pace.  The export basis has been firm for the last few weeks and we now expect the export basis to begin showing dramatic improvements.  This in turn would create some pretty decent competition between the ethanol producer and the exporter.  With this in mind it suggests the price of U.S. corn still has a fair amount of room to move higher.  Because of the ultra-tight scenario for old crop corn the old crop/new crop spreads have moved into new high ground.  We also now expect the futures' spreads within old crop to start improving.

It is thought that the price performance in new crop corn has been quite successful in securing needed acres for the coming season.  The USDA will give us a look at some acreage projections that were compiled last fall next week.  It is thought that the U.S. needs 92.0 million acres WITH a good growing season just to stabilize the reduction in stocks.  This does not take into account any new demand.  Until we see evidence of price rationing for old crop and see a better idea of new crop acres the corn market will be well received by the speculative sector any sort of price breaks.  Since the first of the year we have seen corn futures' open interest rise by 170K contracts.  We have already surpassed the highs in open interest seen in 2008.  With that in mind we can not rule out a challenge of those price highs if not higher.  As the price moves higher so does the volatility.  March options expires next Friday - all the more reason for increased volatility.

(Source: http://www.insidefutures.com/article/219037/WEEKEND%20MARKET%20REVIEW.html)