Forget drought, "demand rationing" is corn's new master
Reuters asks a tricky question this week: Just how much less food, feed or fuel will be made from corn as buyers cut back (because of the drought and limited supply)?
Because demand will have to be "rationed,"buyers – food companies, ranchers, ethanol plants and even plastics makers and other manufacturers – must determine if they can pass along higher corn prices to consumers and/or seek cheaper grain options. That adds instability to the market.
“In theory, the mystery of demand should offer opportunities for smart traders to capitalize on volatile markets,” the news service noted. “In practice, the evidence needed to quantify demand can be so disparate and piecemeal that it defies order.”
Reuters offers an interesting examination of the various influences on demand for corn. Here's part of the analysis with regard to the ethanol market:
Modeling demand for food is a tricky task in the best of times. It is generally regarded as largely "inelastic", meaning consumption tends to resist the effects of higher prices. Historical assumptions can provide a useful guide.
But the growing role of the ethanol industry -- which consumes 40 percent of the U.S. crop -- has introduced a new set of variables. Even setting aside the possibility that President Barack Obama could offer a waiver of ethanol blending quotas this year, corn traders must now take stock of New York gasoline prices, Brazilian sugar exports and ethanol credits.
The USDA cut its forecast of corn use for ethanol in the 2012/13 marketing year by 400 million bushels this month to 4.5 billion bushels, the lowest in four years. At that rate, output would be short of the government's 2012 mandate of 13.2 billion gallons (50 billion liters).
Some analysts say the estimate is too low. Rising oil prices mean ethanol is still cheaper than gasoline in some places, encouraging refiners to maximize its use in blending.
Production cuts by an estimated two dozen plants -- mostly older, less-efficient facilities located further from the corn belt -- have helped boost margins enough to sustain output.
"I think we'll see a fairly aggressive pace of demand rationing in the export sector first, followed by feed, followed by ethanol," said Shawn McCambridge, analyst with Jefferies Bache.
But others questioned whether use may decline further, citing a recent slowdown in ethanol production blamed on poor plant margins amid this summer's historic rally in corn prices.