Wednesday, November 10, 2010

Corn Prices Supported Growing Ethanol Production

Corn prices continue to be supported by expectations that the USDA will reduce the forecast size of the 2010 U.S. crop and by a rapid pace of ethanol production. The rate of exports and export sales has been somewhat disappointing, according to University of Illinois agricultural economist Darrel Good.

"Reported expectations for the Nov. 9 USDA Crop Production report are for a slightly lower yield and production forecast, with the average yield guess reported at 154.4 bushels. The October forecast was 155.8 bushels. A smaller production forecast without any change in the consumption forecasts would further reduce the
expectations for the size of year-ending stocks."

A 114-million-bushel reduction in the forecast of crop size, as implied by a yield of 154.4 bushels, would reduce the projection of year-ending stocks to 788 million bushels or 5.8 percent of projected consumption.

Ethanol production during the first nine weeks of the 2010-11 corn marketing year averaged 36.344 million gallons per day. Average daily production in September and October 2009 was 30.833 million gallons per day. Corn use for ethanol production this marketing year then is running 17.9 percent ahead of last year's pace.

"For the year, the USDA has projected a 3.1 percent increase in the amount of corn
used for ethanol production. If that projection is correct, the pace of ethanol
production during the final 43 weeks of the current marketing year will have to only
equal that of a year ago."

It appears that the pace of ethanol production could be significantly influenced by
the fate of the blender's tax credit that is due to expire at the end of the current
calendar year.

"The projected level of ethanol production in 2011 is above the mandated level. Now
that ethanol prices have moved above gasoline prices, ethanol blending margins would be negative without the blender's tax credit. With negative margins, ethanol
blending could decline to or below the mandated level, as blenders use credits
generated by recent excess blending levels to partially meet the mandates."

An increase in gasoline prices relative to ethanol prices would, of course, improve
blending margins and maintain blending levels.

The USDA has projected 2010-11 marketing year corn exports at 2 billion bushels, only 13 million more than exported last year. Through the first nine weeks of the marketing year, cumulative export inspections were reported at 313.5 million bushels, about 16 million less than the total of the previous year. The weekly Export Sales report shows a similar lag.

Good said that Census Bureau estimates of exports typically exceed those of the USDA, but they are not yet available for the current marketing year. The Census
Bureau estimates for September 2010 should be released this week and will be a
better indicator of the year-to-year change in shipments.

"For major customers, USDA estimates indicate that shipments of corn so far this
year are running slightly ahead of last year's pace only for Japan and Egypt. The
year-to-year declines are largest for South Korea and Mexico,."

Outstanding export sales as of Oct. 28 were substantially larger than those of a
year ago. Unshipped sales were reported at 504 million bushels, 105 million more
than those of a year ago.

"Japan, Egypt, and Mexico all have large purchases on the books. South Korea does
not. South Korean export commitments (shipments plus outstanding sales) were down 37 million bushels (also 37 percent) from those of a year ago. There are large sales to unknown destinations but none reported for China."

Although the current magnitude of outstanding sales supports the USDA's projection
of marketing year exports, the concern centers around the slow pace of sales for the
three weeks ended Oct. 28. Sales averaged only 15.8 million bushels per week during
that period. New sales of 25 to 30 million bushels per week would be more encouraging.

"Corn prices have traded in a fairly narrow range over the past three weeks, with
December 2010 futures establishing a high of $5.95 on Nov. 4. Prices should continue to be well supported if USDA does lower the 2010 production forecast. After that report, prices will reflect the pace of consumption. Near term, the focus will be on
the export pace and the fate of the ethanol blender tax credit."

Source: Darrel Good, 217-333-4716, d-good@illinois.edu

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