How Low Can/Will Corn Prices Move?

I realize that most traders are inclined to be bullish and long the grain market, especially on the back side of a very dry August. However, the corn crop was made during July when moisture was plentiful and pollination occurred during a long cool spell. How quickly traders forget. Granted, dry August conditions and one week of warmer than normal temperatures (that's right only about five to seven days of above normal temperature occurred in most of the Midwest during August) took the top side off of corn yields, but generally we're looking at respectable yields that should fall between 152 and 156 bushels per acre on a national level. Factoring in the acreage and we'll likely harvest a record large crop, one that is likely going to be closer to 14 billion bushels than 13 billion.

In addition to the high likelihood of reaping a record large corn crop this fall, most traders don't seem to realize that we've peaked corn demand. One third of corn demand, for this crop, will come from the ethanol industry. At this moment there's not one new ethanol plant under construction in the U.S. What I'm trying to say is that one third of corn demand is a mature market that will not experience any growth over the next 12 months, regardless of price. The second component of corn demand, exports is also small relative to historical levels. There are two major reasons for this, stable meat production outside of the U.S and dramatically higher corn production outside of the U.S. 
 
 

 

 The sharp rise in corn prices over the last two years has stimulated a massive response on the part of world corn producers. With ethanol demand stable and with export demand slowly recovering but small compared to historical standards, the burden on demand lies solely on the feed component. Cattle numbers, however, are still declining so we'll not see increased corn feed demand from the beef industry for several years. The good news for corn producers is that poultry production is rising and there's a very good chance that U.S. hog producers are also entering into a major expansionary phase. Expansion in the hog sector, however, has not been confirmed yet by the USDA. 

The math, while simple, is simply strange for the corn trader to get used to. Indeed, we've become accustomed to and almost complacent toward historically high corn prices. It won't last. Rising production and declining demand will allow ending corn stocks to swell dramatically both at the U.S. level and on a world level. Most traders simply won't believe the math and the dramatic change in the supply/demand table until the crop is in the bin. The sharp move downward in corn will be nearly over by then. Look for a move toward $4.00 during harvest.
Please share this article