Is the corn market making you nervous? If so, you may not be fully protected. Do you make up that protection on the way down, or in the midst of volatility? But with the acreage report due out in two weeks, with spring planting nervousness, and with summer weather issues, is the corn market really finished with its bullish performance?

Most of the commodity market analysts and marketing specialists are not making any predictions until USDA’s Prospective Plantings Report is issued on March 31. And Purdue’s Chris Hurt is one of those who believes the acreage report will have a significant impact on the market. In his recent newsletter, Hurt suggests that the corn market has been in winter dormancy, while the focus has been on soybeans and spring wheat nibbling away at potential corn acreage.

Hurt’s expectation is for 88 million acres of corn, and he says that’s not enough. 88 million would be more than 5 million less than last year, and with a trend yield, the 12.4 billion bushel production would be insufficient to supply the demand. Additional demand will come from more ethanol plants starting up which will require 1.4 billion more bushels than were needed from the old crop. Hurt adds that to the 13 billion bushel utilization from the current marketing year, and that means 14.4 billion bushels of corn will be needed. Subsequently, there will not be enough to go around, and substantial rationing will occur.

Of the ethanol, industrial, export, and livestock industries, Hurt rhetorically asks who is going to get cut first?
1) Ethanol production will be determined by the ethanol margins, and whether it is profitable to refine ethanol at a given price. The profitability will be determined by the price of gasoline and that means the price of crude oil. High crude oil prices means that ethanol producers will be able to bid higher for corn, and Hurt says the futures market suggest that ethanol plants can bid $5.25 to $5.50 and remain in the black.
2) Higher prices for corn-based industrial products such as high fructose corn sweetener can be passed on to consumers. Food and soft drinks may cost a couple cents more, so Hurt believes that industry will get the corn it needs with steady demand.
3) The export sector has been at a high demand level, despite high prices, which are mitigated by the low value of the dollar. The currency value and world economic growth are expected to continue driving export demand for the new crop. It could soften somewhat with Hurts concerns about a strengthening of the dollar and more corn being produced around the world.
4) The livestock industry is the most fragile with its current financial stress, and Hurt predicts feed use will drop 10%.

The Prospective Plantings Report will be bullish for new crop corn, says Hurt, but old crop corn prices could also move higher, with an early spring peak the first part of April. But he suggests continued volatility in the corn market throughout the growing season due to USDA reports, weather issues, and hedge funds shifting in and out of the commodity market.

Hurt believes that the March 31 report will be bullish enough for December prices to move above the $6 mark. But if your elevator is not offering forward contracts to price grain for fall delivery, how do you sell it? The only choice may be to use the futures or options market with a broker or elevator merchandise helping guide you through the pitfalls. There is little time to learn market strategies if you are preparing to go to the field. But one of the issues that you will need to address with a hedge is to meet the margin calls that may be required, if you have sold (gone short) and the market continues to rise. There may be large amounts of cash that are required to maintain a legitimate hedge, and that may require a conference with a lender.

Purdue’s Chris Hurt says the market could turn into a dangerous turmoil for producers, if there are weather problems. He strongly advises against any speculation and to be sure of any risk you are taking.

Summary:
The 2008 corn market could be dangerous for the faint-hearted and unprepared, due to strong demand for a potentially insufficient crop. Increased demand from ethanol, continued demand from the export and industrial markets will more than offset an expected softer demand from the livestock industry. The March 31 USDA report will indicate planting intentions, but so far, intended corn acreage may not be enough to meet the domestic and foreign demand for corn. Farmers may have to finance their own marketing tools, such as hedges and options, but should know all of the risk being taken.