Commodities: Demand Destruction in the Corn Market (farmers could get hosed in 2013)

The futures are down 6 3/4 cents at $7.645.
Price rations use. And it manages to do it without government edicts. Pretty cool.

The first end-use that is being hit by higher corn prices is ethanol. As higher prices ration the crop the next end use to be affected is animal feed.

Finally come the value added products where the commodity cost is a small percentage of the final price.
Think ADM's superabsorbants used in adult diapers. This product serves both the aging baby boomer market and the younger caught-on-the-wrong-side commodity trader market.

From BusinessWeek:
Corn Drops on Concern Rally Is Curbing Demand; Wheat Declines

Corn fell for a second day in Chicago on speculation a drought-fueled rally to a 13-month high may curb demand for supplies from the U.S., the world’s largest grower and exporter. Wheat also dropped. 

U.S. output of ethanol, made from corn, fell 4.2 percent in the week ended July 6 to the lowest in almost two years, Energy Department data show. U.S. feedlots likely cut cattle purchases by 1.5 percent in June from a year earlier amid higher corn costs, according to a Bloomberg survey of analysts before a government report July 20. Corn has surged 51 percent since mid- June as Midwest crops withered under the drought.

“Demand is being rationed,” Arnaud Saulais, a broker at Starsupply Commodity Brokers, said by telephone today from Nyon, Switzerland. End users “are just buying day after day, week after week. They are not buying for the long term."...MORE 

...Corn may climb to $9 a bushel if drought cuts U.S. yields to below 140 bushels an acre, unless there is a “demand meltdown,” UBS AG said today in a report. The U.S. Department of Agriculture cut its yield estimate to 146 bushels an acre on July 11 after projecting record 166-bushel yields in June....

We're already seeing estimates in the137 bu/acre range with whispers down to 129.
And here I was praising the USDA for getting out in front of the reality just last week:
USDA Does the WASDE Just Right: Corn Pops, Drops, reverses
 It was good for a day trade but that was all.

From DTN's Progressive Farmer:
The Danger of Demand Destruction

What killed the corn also killed the grass. Corn prices are soaring in thinly traded territory, and as ethanol plants shut down, DDG supplies are tightening. Nothing is cheap on the feed board, a stark reversal from just a few months ago. 

The cattle herd, once set to expand, will likely stay the same size or contract. There simply won't be enough to feed all the mouths. Farmers will start cutting down on their hog herds and poultry flocks, eventually they'll have to trim the breeding herd. 

The livestock production cycle is longer than that of crops, and retail meat prices can't increase now. Those prices go up when the smaller numbers of chicks, piglets and calves that ate high-priced feed make it to market, maybe a year and a half from now.

That's a long horizon for loss, unlike demand for ethanol and exports, which bounce back when corn prices decline.

"We always come back after such major prices and say that seemed nice, but what happens to the concept economist talk about, demand destruction?" said Chris Hurt, an extension ag economist for Purdue University. 

USDA estimates we'll produce 12.9 billion bushels of corn, but many estimates are lower. Hurt said total production could be more like 11.5 billion bushels. 

Now, look ahead to the next crop year. This year's corn crop is short and prices are high, it's likely to hold corn acres steady or drive them higher in the 2013-14 crop year....MORE