Corn prices fall responding to inventory report, spring prospects

By Susanne Retka Schill | April 04, 2013

In a welcome move for corn buyers, the U.S. corn market dropped dramatically in recent days on news of higher-than-expected corn inventories. “Right across the board from ethanol to livestock to food processing, this lower price is bringing a lot of relief,” said Darrel Good, University of Illinois agriculture economist. “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.”

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 reported by Bloomberg analysts. The unusually large price move was partly a correction for a 50 cent increase in anticipation of the report, Good explained. “The volume of trades also indicated we had a lot of people running for the door to get out of their long positions.”  Most often, when the market has that violent of a reaction, he added, there will quickly be a market rebound. “We’ve just not seen that at this point. What’s settling in is that we are continuing to make the transition from the drought-reduced crop of last year.”

Near record planting intentions and improved moisture conditions are raising prospects for a good crop. 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.  “Those numbers could change quite a bit,” Good cautioned, while noting 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. 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 added. 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,” he said.  

Lower corn prices are improving the situation for ethanol producers who’ve been operating on slim to negative margins for many months. Spot cash margins have improved quite a bit, Good says. “We follow the wholesale CBOB and ethanol prices at Chicago and they’ve tracked pretty well through the current time period. That’s one reason ethanol margins got hammered, because ethanol prices didn’t move up as much as corn prices did.” The improvement in margins and futures spreads is providing opportunities for risk managers to lock in positive returns. Yet, even as the futures market dropped, the local basis—the difference between the nearby futures price and local cash price—strengthened. “The basis continues to be strong in most areas, probably record strong,” Good said. “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.”  

“It will be interesting to see what reaction that brings in terms of ethanol production which has been lagging this year,” Good continued. With ethanol production down 15 percent in the first half of the corn marketing year, ethanol inventories have been brought down. “It seems as if the industry is lagging a bit in blending ethanol this year, which is a bit of mystery,” he added.   

“In the bigger picture, the important development for ethanol moving forward is E15,” he said. “Everybody’s aware of that. We’ve hit the E10 blend wall. If we’re going to expand ethanol consumption, it’s going to have to happen in higher ethanol blends. It’s moving pretty slow right now and everyone would like to see that pace pick up.”