The U.S. corn market dropped in recent days because of news of unexpected corn inventories, according to a report by Ethanol Producer magazine.
The corn market took off nearly $1 a bushel since the March 28 USDA Grain Stocks report that put March 1 corn stocks at 5.40 billion bushels in all positions. The inventory numbers were significantly higher than the expected 4.99 billion bushels.
According to Darrel Good, an agriculture economist of the University of Illinois, this news is a welcome move for U.S. ethanol producers who’ve been operation on slim margin for months. “Right across the board from ethanol to livestock to food processing, this lower price is bringing a lot of relief,” says Good. “What this report confirms is that rationing has taken place and it appears we have ample supplies to get through the rest of the marketing year.”
Good has been following the wholesale of corn and ethanol prices at Chicago. Ethanol prices didn’t move as much as corn prices did which led to ethanol margins getting hammered. Improvements in margins and future spreads are providing opportunities for risk managers to lock in positive returns. However, even if the futures market dropped the local basis strengthened. The local basis is the difference between the nearby future price and local cash price.
“The basis continues to be strong in most areas, probably record strong,” says Good. “It has strengthened a bit as futures prices have turned lower recently. In central Illinois, we’ve strengthened two or three cents on the basis in recent days.”
Good also explains that the unusually large price move was partly a correction for a 50 cent increase as players anticipated the report. “The volume of trades also indicated we had a lot of people running for the door to get out of their long positions,” says Good.
The normal turnaround when the market is violent is that it quickly rebounds. In today’s developments that is just not the case. “What’s settling in is that we are continuing to make the transition from the drought-reduced crop of last year,” says Good.
Additional things to consider are the near record planting intentions and improved moisture conditions that are raising prospects for good crops. The USDA’s first planting intentions report came out on the same day as the stocks report, showing planted corn acres should be slightly higher than last year.
However, Good cautions that those prospects could still change because of some shifts in state-level intentions. “Those areas that suffered the worst with the drought last year show some reduction in intended corn acres with the increase coming primarily in North Dakota, Minnesota and the southern U.S. where the crop yields were good last year,” explains Good. “In fact, the southern U.S. had the best yields ever.” Intended corn acres are down slightly, though, in the heart of the Corn Belt.
Heading into the spring planting season, moisture conditions east of the Mississippi River are back to normal, although in the western Corn Belt there continues to be extreme dryness with Nebraska at the center. “It looks like over the next week to 10 days the chances are pretty good for some good rains,” Good adds. After last year’s early start to planting, this spring’s cold March has farmers anxious to get working. “At this juncture we’re still thinking we can get most of the crop planting done in timely fashion,”
“In the bigger picture, the important development for ethanol moving forward is E15,” Good says. “Everybody’s aware of that.”