Corn prices reversed course rather dramatically from this morning's 3% rise on the USDA's lowered forecast for bushels per acre from 166 to 146. The larger than expected cut was driven by the worst drought to hit the Midwest since 1988. For traders long corn, the lack of rain has been a boon with prices per bushel up more than 30% since early June. Farmers and Americans hoping for lower prices at the grocery store may have a different view.
According to Kevin Craney of RJO Futures, the trading pits were stunned by the size of the USDA reduction but "the bigger question is whether or not we can trust these numbers." His skepticism is rooted in the fact that it's only July, which is late in the growing season but not the point at which USDA can rate crops with any certainty. The 146 bushels per acre is based in part on the weather forecast for the balance of July. Right now there isn't much rain on the horizon but both life experience and common sense say such an outlook is to be taken with a grain of salt.
In theory the government may be concerned about the impact of rising corn prices on the economy. In reality, where people live and eat, it's unlikely anything will be done. For this Craney blames "inelasticity of demand for corn because of the biofuel mandate by the government." About 1/3 of the U.S. corn crop is used for the production of ethanol. Though long understood to be inefficient and damaging to the overall economy, calls to reduce or even eliminate the additive have long fallen on deaf ears for political reasons.
Another enormous end user of corn is the livestock industry. There we might see reduction in the size of herds as corn prices squeeze margins but not enough to hold prices down for long in Craney's estimation.
"It's really a mixed bag in terms of what's going to drive this but I think higher prices are certainly coming in the not so distant future," he predicts.
Craney cautions against making too much of the crop report from this morning.
"Weather is going to be the big factor going forward," he says, "all eyes are going to be on the extended range forecast." In other words, if you're a corn bear or a farmer, it's time to start praying for rain.