Global corn supply will expand while demand will falter in 2012. This is bearish for corn prices.
C orn prices were well above 600 cents per bushel most of last year. This was a reflection of a many factors including the Russian drought in mid-2010, the U.S. drought in 2011, rising corn use for ethanol in the U.S., and the boost in hog production in China. These factors should either disappear or diminish in 2012.
- On the supply side, production is expected to increase in 2012 on the back of higher world acreage and a recovery in U.S. corn yields.
- On the demand side, two major drivers of global corn consumption (U.S. ethanol expansion and rising protein consumption from China) will lose strength in 2012, according to our Commodity & Energy Strategy service.
At current ethanol and corn prices, ethanol producers’ profit is negative. Corn prices will fall as some producers start to cut production and/or go bankrupt. Also, last year’s boost in Chinese hog production may drive down pork prices in 2012, which in turn would undermine hog production and feed grain (mainly corn) consumption. The major risks to the bearish view are weather events (that could curtail supply) and an oil price surge (because it increases demand from corn-based ethanol producers).
Bottom line: Rising supply and faltering demand will replenish depleted global inventory and drive down corn prices. Corn prices are likely to drop to the range of 350-450 cents per bushel by the end of 2012 in the absence of major weather events and/or an oil price surge.