The good news in the corn craze

June 9, 2011, 8:06 PM UTC

Corn prices are popping again, but there is a morsel of good news too for those who fear corn flakes inflation.

Corn futures surged 3% in trading Thursday after the government slashed its corn planting forecast and raised its price projection. The Agriculture Department now expects corn to fetch a record $6 to $7 a bushel this year, which is 50 cents above its previous forecast.

Growing to the sky?

The latest spike shows “the balance sheet is tightening, no question about that,” says Sal Gilbertie, who runs the Teucrium Corn (CORN) exchange-traded fund.

With emerging markets such as China consuming more corn and U.S. demand fed by government-mandated ethanol use, the demand for corn keeps rising steadily while supply growth is spottier, relying on things like good weather.

That’s why the market was goosed by Thursday’s announcement that corn stocks, already at a 15-year low, will fall further this year, ending the season at a projected 5.2% of corn use. That doesn’t leave much room for error.

What’s more, soaring corn prices – near-month futures have doubled over the past year (see chart, right) – are prompting farmers to plant “corn, corn and more corn,” Gilbertie says.

That’s nice for a while because it answers the supply question. But over the longer haul it makes the balance even more precarious, because farmers planting more corn move away from soil-enriching crop rotation toward heavier fertilizer use – which in turn makes crops more vulnerable to turns in the weather and prices more apt to spike now and again.

The silver lining in Thursday’s corn cloud, Gilbertie says, is that the USDA kept its yield forecasts unchanged – and he believes there is a good chance farmers could surprise to the upside, which would tend to bring prices down at the end of the season.

Increasing yields are part of the answer to the longer-term supply-demand question, and the farmers’ success in getting more ears out of each acre isn’t in danger of running out, Gilbertie says.

“There’s no reason to believe we can’t keep increasing yields,” says Gilbertie. That’s the good news. The bad news is that there are going to be a lot more days like Thursday no matter how successful farmers are.