CORN DEMAND IN YEARS FOLLOWING SHORT CROPS JULY 2013 CORN PRICE: SHORT CROP EFFECT 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1995/1996 1981/1982 1989/1990 1997/1998 1977/1978 2001/2002 1971/1972 1975/1976 1969/1970 1973/1974 1985/1986 1999/2000 2005/2006 1987/1988 1991/1992 1993/1994 1979/1980 2003/2004 2007/2008 2009/2010 1983/1984 2011/2012 2013/2014 $8.25 $7.75 Price Per Bushel Million Bushels $7.25 $6.75 $6.25 $5.75 $5.25 Mar ch No vember January Ma y July Mar ch 2013 2012 Sept ember Source: USDA Closer Look at Corn Demand With production dropping by 13 percent, U.S. corn demand during 2012–2013 was trimmed by 1.3 billion bushels to the lowest level since 2004–2005, an 11 percent decline. How will corn demand rebound from the drought-related rationing? As of this writing, USDA estimates use will rebound to 12,750 million bushels, which is 14 percent above 2012–2013 and 2 percent above two years ago. Of course, usage always rebounds to some extent in the year following a short crop when production rebounds, but does the demand base show a lingering eff ect from drought-year rationing? To fi nd out, we compared total use in the years on either side of the rationing years. We identifi ed fi ve years with similar or greater declines to 2012 in both U.S. production and use: 1974, 1983, 1988, 1993 and 1995. The results are mixed, but generally show a limited lingering eff ect. In three of the years following drought, demand fell short of the predrought level and in two of those years exceeded it. For example, after the 1988 drought, 1989 total use was 5 percent higher than the predrought level in 1987, a bigger increase than what’s predicted for 2013–2014. In theory, domestic demand now should have an easier time rebounding due to the higher percentage of use for ethanol, which is not dependent on rebuilding herds like feed use is. If a demand market develops, a strategy of locking in higher, deferred futures prices and watching for appreciation in basis levels may give growers a nice risk-reward opportunity. Export Competition On the export side, it’s interesting that total world demand did not shrink in the face of the U.S. drought. USDA’s trade-adjusted balance sheet most commonly cited shows a decline of about 2 percent, but the sum of all use by individual countries shows about a 1 percent increase. The discrepancy lies in reconciliation required to put both Northern and Southern Hemisphere crops into the same 12-month balance sheet. What happened? Demand in the Northern Hemisphere was satisfi ed by Southern Hemisphere supplies more than usual, meaning corn left the Southern Hemisphere in what was locally the 2011–2012 marketing year and arrived in the Northern Hemisphere in the 2012–2013 marketing year. Complicated accounting aside, the point is that world corn users found alternative supplies, shrinking the U.S. share of the world export market, but not lowering overall demand. The continued growth in world demand means opportunities for U.S. farmers to protect profi table production margins should continue, but may be more short-lived due to new competition from Ukraine and second-crop Brazilian production. LEARN MORE: Get market news on Twitter by following @hedgit. Your CHS Connection 21 Ma y Source: CME