The combination of late planting and slow maturation in the US corn crop resulted in a full-fledged October weather market in corn last week. In this case the “weather market” came on a freeze warning in the Northwest Corn Belt that is expected to trim 100-150 million bushels off the most optimistic private forecasts of a just a week or two ago. This would still leave the corn market with adequate stocks of somewhere near 1.5 billion bushels at the end of the 2009/10 crop year, all things being equal on the demand side.
Of course, all things are not equal in terms of 2009/10 demand, and ethanol may turn into the real change factor. This was signaled by the latest monthly report on ethanol production from the Energy Information Administration. The EIA showed a surge in ethanol production in July to record levels. This implied actual corn usage of a record 347 million bushels that month. If this high rate of usage continued into August, it would have added 60 million bushels to the USDA’s previous projection of 3.675 billion bushels for ethanol use during the 2008/09 crop year. (EIA reports lag by two months.)
The USDA’s September 1st Stocks-in-All-Positions report seemed to confirm that this is exactly what occurred. The report pegged stocks at about 45 million bushels below trade expectations but slower feed usage by about 15-20 million accounts for the usage.
The accompanying charts show the monthly corn-for-ethanol usage rate along with the monthly rate of production for ethanol itself. The latter chart highlights the sharp uptrend in US ethanol production in recent years, and this is where the real change in demand for 2009/10 is likely to come. This starts with the latest USDA September projection for 2009/10 corn ethanol usage at 4.2 billion bushels. The big July corn-for-ethanol usage number we mentioned earlier has already reached to very near the average monthly rate needed to meet the 4.2 billion bushel usage projection for all of 2009/10. This means that if ethanol production were to flatline at the July level for the following 13 months, we would come in near the 4.2 billion ethanol usage projection. However, the steep long term uptrend in actual ethanol production shown on the second chart makes that scenario seem highly unlikely. It is far more likely that this uptrend will continue into 2009/10, resulting in much higher than expected corn-for-ethanol usage. (Note to readers: the USDA released its Crop Report and Supply/Demand reports on October 9th, after we went to press.)
Some analysts have already bumped their corn usage numbers for ethanol to as high as 4.6 billion bushels for 2009/10. This is considered high at present, but we would not rule out a number that high or even higher when all is said and done. US ethanol capacity is already far above that level, and some traders are talking about possible US ethanol exports to India and Europe. In addition, the allowed blending rate might increase, which could increase ethanol demand even further.
If we do see a loss of 100-150 million bushels of corn from a freeze on Oct 9-11 and we add another 200-400 million bushels (or more) in ethanol usage for 2009/10, this could push 2009/10 ending corn stocks down near 1.1 billion bushels. That is very manageable and could easily support a price of over $4 in the nearby corn contract in 2010. If this comes in conjunction with a continued slide in the dollar and the inflationary surge that so many Americans fear, the pace of imports could also surge as buyers around the world try to stay ahead of the next wave of food inflation.