August 12, 2008 / 5:37 PM / 11 years ago

Ethanol demand could spark new bull market for corn

CHICAGO (Reuters) - The worst may be over for U.S. corn, the price of which has tumbled 36 percent from a record high six weeks ago, with some analysts expecting a bounce later this year as ethanol production continues to climb.

There are some expectations this year’s crop could fall short of the forecast issued on Tuesday by the U.S. Agriculture Department, which said farmers could produce their second largest crop in history despite the worst floods in 15 years in the Midwest in June.

“The people I’ve spoken with, their views of the crop are certainly dramatically different than what these yields today say and what the conditions say ... they’re much more cautious and much more conservative,” Rich Feltes, director of research for MF Global, told a panel discussion on the USDA report.

USDA, in its August crop report, shocked the trade by pegging 2008 U.S. corn production at 12.3 billion bushels, the second largest ever and roughly 300 million bushels more than an average of analysts’ estimates.

It also raised the average yield to 155 bushels per acre, up from 148.4 in July. <ID:nDAT001109>

“It’s important to note that most of that unexpected production gain was offset by higher demand and the fact USDA pegged ethanol demand at 4.1 billion bushels this year infers to me there will be at least 4.5 billion bushels for the 2009-10 campaign,” Feltes said.

USDA raised by 150 million bushels, to 4.1 billion, its expected total of corn to be used to make the alternative fuel ethanol this year, a massive 33 percent of the crop.

That’s a huge leap from only 3.0 billion bushels, or 23 percent, of last year’s crop. The soaring demand for corn to make ethanol and shrinking stocks of soy are expected to lead to a bidding war for acreage next year.

BEAUTY CONTEST

“This was a beauty contest. NASS (National Agricultural Statistics Service) did not have much to count in terms of ears in terms of girth, we still aren’t measuring test weight which in these kind of years, late planted flooded years, tends to be on the short side,” said Dan Basse, president of AgResource Company.

The massive corn crop was forecast despite the worst flooding in 15 years in June in key corn states like Illinois and Iowa, slow early growth of the crop and one of the latest planting seasons in history.

Excessive wet weather in June was quickly replaced by greenhouse like growing conditions in July, leading to a steady increase in crop conditions and a big ratcheting up in estimated corn yields.

Corn prices have plunged nearly 36 percent in roughly six weeks from the record high $7.65 per bushel hit during the tail end of the flooding in late June, but analysts don’t think corn prices will keep falling.

“Obviously the USDA has confirmed how nice the crop looks but in the final analysis we don’t think the net yields can be that high,” said Gavin Maguire, analyst for E Hedger.

He also said the marketplace has to contend with the “current distaste” for commodities by large speculators who are selling their holdings because of increased government oversight and investigations of big traders.

When the current spate of fund liquidation of commodity holdings ends, corn, soybean and wheat markets should begin a new march to higher price levels, led by soaring demand for food and fuel.

“People are heading for the exits right now and asking questions later and when this ends, grain prices should begin rising,” Maguire said.

Editing by Christian Wiessner

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