Corn Futures Spiking as USDA Reports Decrease in Supply

The outlook for international food and grain supplies is looking more uncertain after the United States Department of Agriculture (USDA) reported projections that corn supply would decrease to lowest level in 15 years according to the Wall Street Journal.

The supply of corn has been depleted for a multitude of reasons including increased ethanol production, increased livestock feeding, and resulting rises in international demand. Luke Chandler, a commodity research analyst for Rabobank, has suggested that ethanol production has “changed [markets] in a structural way” and that the recovery for prices will take substantial time.

Consumption rates as evidenced by the USDA report show that the 12.4 billion bushels harvested in the US agricultural sector will decrease to 651 million bushels by August 31, 2011.

According to research from the Chicago Board of Trade, futures markets for corn in March spiked 3.6 percent, or 24.25 cents per bushel. Currently the price of this commodity is hovering around $6.98. The core futures markets of corn, wheat, and soybeans, have jumped 97 percent, 107 percent, and 56 percent respectively.

The figures released by the USDA also indicate that increased ethanol production will require 40 percent of the annual harvest. Biofuel production has increased from the 2010 levels of 12 billion gallons to 12.6 billion this year as per the mandate of the US Congress. The Obama administration has defended the policy, and Agriculture Secretary Tom Vilsack, has stated that ethanol isn’t solely responsible for the rising food costs.

Commodities analysts in the agricultural sector are having difficulty determining why grain consumption is still occurring at such high levels. Many credit the weak dollar with ensuring export demand from abroad. Exports for wheat are expected to rise by 48 percent in the next year due to the droughts experienced in Russia last summer.

Sources:

1) http://www.marketwatch.com/story/corn-futures-rally-on-supply-forecast-2011-02-09

2)http://online.wsj.com/article/SB10001424052748704858404576134192456647006.html?mod=googlenews_wsj

3) http://news.medill.northwestern.edu/chicago/news.aspx?id=178059