Just one year ago, farmers planted more than 90 million acres of corn with the knowledge that the ethanol industry would require substantially more corn. As they planted last spring, December 2007 corn futures were hovering around $4 per bushel, a price that would ensure huge profits if they wished to lock in a price early.
At the same time, analysts continued to wonder if corn could again top $5 like it had done in 2006 and what implication it would have for global food prices. It seems strange that $4 corn was seen just last year as a very high and profitable price because July 2008 corn futures topped $7 per bushel for the first time in history this week. In fact, corn had never been above $6 per bushel until earlier this spring.
Many people are quick to point to the ethanol industry as the big culprit in record-high corn prices. That may have been the case last year as U.S. corn production reached a record high only to see inventories grow only marginally due to demand from the ethanol industry. This year is different though.
Farmers shifted away from corn as record high wheat and soybean prices enticed them to plant more of those two crops. The drop in acres was then combined with a cold, wet spring that delayed corn plantings in much of the Midwest for more than a month.
Now that farmers finally have their fields planted, they have to hope for cool weather in July and August to prevent harm to their corn crops during germination. Anyone who lives in the area stretching from Kansas to Ohio knows that asking for temperatures below 90 degrees for any length of time in the summer is like asking for snow in Atlanta for Christmas. It's possible, but shouldn't be counted on.
The acreage declines and planting delays have been known for some time and they caused corn to top $6 earlier this year, but they were just the background for this week's news that pushed corn above $7. This week, the USDA announced the condition of corn in the U.S. had declined in the past week.
The report showed the percentage of corn rated good or excellent in the U.S. had fallen 3 percent, to 60 percent. For perspective, the 10-year average for this time of year is 69 percent and last year at this time, the rating was 77 percent.
As if this news wasn't bad enough, news of widespread flooding in corn-growing regions began to surface this week after weekend storms in the upper Midwest caused rivers and streams to overflow further south. The flooding, combined with strong storms during the weekend, flooded some fields and washed away some seed waiting to germinate. At this point in the year, it is too late for most farmers to replant their corn. As a result, some may just switch to soybeans because they require fewer days to mature and can be planted this late in the year.
It appears as though a perfect storm is brewing in the corn market. Huge demand from ethanol producers, livestock producers and food makers are combining with a drop in plantings, lower than average condition ratings, excessive planting delays and flooding.
In just the past six trading days, the July corn futures prices has moved from $6.15 to more than $7.20, a move of more than 16 percent. Also, it is important to remember that we have not even entered the hottest portion of the summer, the period when corn will be forced to germinate due to the late planting.
The stress of excessive heat during germination could cause an even further deterioration in yields and condition ratings, putting more upward pressure on prices.
Only time will tell if the weather cooperates, but right now, all of the news is bullish.
Opinions expressed solely are those of the writer. Walt Breitinger is vice president of commodities at Wachovia Securities. He can be reached at (219) 738-6460.
