Corn hits a record high and only lower oil prices look capable of bringing relief

04/06/2011 6:08 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

“Essentially, we don’t have any corn,” a Minnesota commodity broker told the Financial Times yesterday.

And that about sums it up. According to earlier projections, corn stocks are will drop to a 15-year low of 675 million bushels by the end of the marketing year on August 31.

That may be the good news. On Friday, April 8, the commodity markets worry, the U.S. Department of Agriculture could release new projections showing that by the end of August U.S. corn stocks will equal just four days of supply. The USDA could cut its projections to 525 to 575 million bushels. The all-time end of season inventory low was 426 million bushels in August 1996.

You can guess what this has done to the price of corn. In Chicago May corn hit $7.65 a bushel on Monday, April 4, the highest prices since the top of the 2008 commodity spike. Yellow corn, used in animal feed and ethanol, is up 120% in the last year.

Higher prices are supposed to damp demand—but that isn’t happening yet because with oil over $100 a barrel, it’s profitable to use even corn at these prices to produce ethanol. (Ethanol production consumes about 40% of the U.S. corn crop.) The top in corn prices depends on how high oil will climb.

Consumers need to fasten their seat belts: higher corn prices haven’t yet worked their way into higher prices for pork, beef, and chicken because most livestock producers locked in lower corn prices in March when the grain price hit a two-month low. Producers such as Tyson Foods say they’ve locked in corn prices for animal feed through the summer.

But producers who have locked in lower prices for the months ahead are still starting to take steps that will result in higher consumer prices down the road. In the face of what are likely to be high feed prices even when current contracts expire, livestock producers are reducing plans to increase the size of their herds or flocks. With export demand high that will mean tighter supplies of chicken, pork, and beef—and higher prices.

And all this is going on before the growing season—with all the uncertainties that brings--has even started.

 

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