Market reacts to weather conditions, outcome yet unknown

By Holly Jessen | July 18, 2012

Continued drought is impacting the futures prices for corn and ethanol, resulting in significant movement in the last three weeks. Emotions are high, said Rick Kment, a Telvent DTN biofuels analyst, as the possibility of tight corn supply looms large. “Right now the ethanol industry is in the same boat as everybody else, looking at the corn market not knowing what’s going to happen, what the end result is going to be,” he told EPM.

On July 11, the USDA lowered its corn yield projections to 146 bushels per acre, a 20 bushel drop from the previous World Agriculture Supply and Demand Estimates report. The extent of the drought is yet to be seen, Kment said. He’s heard it compared to the droughts of many different years, such as 1988, 1956 and 1936, but the reality is that it depends on the area.

There are stories of some farmers already disking under destroyed corn crops or feeding the stover to cattle. However, there are places—such as areas of Nebraska and Iowa—where the corn crop still looks pretty good. Still, the unknown is creating a lot of uncertainty in the marketplace. “Right now, we’re trying to jockey for position, not knowing really what the end value or the end result of the corn crop will be and that is probably the biggest challenge at this point,” he said.

Corn prices dropped somewhat July 17, landing at $7.71 cents per bushel for December futures prices. Overall, however, that’s a $1.06 increase from the price July 2, the first day of trading in July. The rise in corn prices began on June 15, when it was at $5.06. Corn futures prices remained fairly steady at $5.05 to $5.40 through most of the spring, Kment said.

Ethanol December future prices jumped 11 cents on July 16, landing at $2.69 on July 17. That’s a significant move from July 2 when ethanol futures prices were at $2.29. On June 15 the ethanol futures price was $2.02.

This is a typical weather market, in which price movements are based on how weather is expected to impact the crop in the field and overall supplies. “These [types] of markets usually come to a top, then they usually fall significantly lower but at this point we don’t know what the top is,” he said. On the other hand, demand markets, similar to what has been happening in the last three to four years, are characterized by a more sustained and continuous movements based on long-term usage versus long-term supply.