Sizzling U.S. cash corn market teeters on edge as soy plunges

CHICAGO, July 25 Thu Jul 25, 2013 12:46pm EDT

CHICAGO, July 25 (Reuters) - Record-high cash bids for corn in the United States were starting to show signs of cracking on Thursday, but strong demand from ethanol plants was likely to prevent a wave of declines that were seen this week in the soybean market, analysts and grain merchants said.

Good profit margins for makers of the grain-based fuel additive allowed ethanol plants to bid as much as $2 per bushel above Chicago Board of Trade corn futures, or $7 a bushel, and still make money, analysts said. Grain buyers have ratcheted up so-called basis bids to lofty levels this summer as supplies dwindled to a 16-year low after last year's drought.

"The ethanol plant guys still have some fancy bids out there. I just don't know that the corn basis is ready to fall apart like the bean basis," said Mike Hall, a futures broker who works with Midwest country elevators and cooperatives. "Watch the ethanol bids, they are key right now."

The stiff competition for what remains of last year's harvest could last as long as another month before farmers harvest the earliest-planted fields in what is forecast to be a record-large 13.95 billion bushel corn crop.

Two large processors in Cedar Rapids and Eddyville, owned by Cargill Inc in the No. 1 corn growing state of Iowa, saw increased deliveries from farmers this week and subsequently reduced the price they were willing to pay for that grain by as much as 95 cents.

But bids have increased to new all-time highs elsewhere in the United States, the world's largest corn producer.

An Indiana ethanol plant owned by Valero Energy Corp was bidding as much as $1.90 above futures while the basis of $1.70 is the highest ever in Decatur, Illinois, where Archer Daniels Midland Corp has its headquarters.

"We are stuck with these high corn basis bids through at least August," a veteran Chicago cash-grain merchant said. "We have to get to new crop. There is a slow erosion of basis in September but not before."

"It's totally different for corn than beans. Bean crushers can shut down in a moment's notice, but ethanol plants have a program going and they have to stick with it," he added.

DECLINES TO COME SWIFTLY

When the old-crop prices decline, the drop will be swift, grain merchants say.

Reduced export demand and a slowing soybean crush led to soybean futures to plunge more than 10 percent during the last three days - the largest such drop in nearly four years. Meanwhile, basis bids for soybeans tumbled as much as 86 cents. Farmers that could have sold their soybeans at more than $16 per bushel on Monday were now seeing prices less than $14.

"This week's price action is a real sign that the party is over from the high prices due to the 2012 drought," Rich Feltes, director of research for trade house R.J. O'Brien, said of the move in soybeans.

"Timing the transition for corn getting from old-crop to new-crop will be difficult, but there is old-crop corn available and most of it is in western Minnesota and eastern North Dakota according to our R.J. O'Brien branch offices," Feltes added.

U.S. Agriculture Department data last month showed the largest corn available outside of the traditional top two producers of Iowa and Illinois was in the northern Midwest and northern U.S. Plains states that were spared from some of last summer's worst drought conditions.

Illinois farmer Brent Johnson is hanging on to about 25,000 bushels of corn from last year. He said he will price it before the old-crop marketing year ends on Aug. 31 and is waiting to see whether prices rise before he pulls the trigger.

"We'll be unloading it by the end of August for sure," he said. "We'd be dumb not to."

Johnson had been hoping to sell his old-crop corn for $7.50 a bushel earlier this summer, but prices didn't climb high enough. Now cash corn prices are below $7. That is still higher than new-crop corn prices that are hovering near $5.

Some growers do not have a target price and are holding corn as a "savings account" in case drought conditions return during the pollination phase that plays a large role in determining what the crop will yield.

"Inventories are getting low and what's left out there farmers don't want to let go of, and I don't know if we can make them," said Diane Klemme, a merchant at Grain Service Corp in Atlanta.

"Once they see corn ears on the plants and beans in the pods, will they say they have a crop and can now let go of this saving account? They thought they had a crop last year, too."

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