I have the pleasure of presenting DTN's take on the corn market to a group of beef producers in Mitchell, S.D., Thursday afternoon. The group will be a mix of cow/calf operators, feedlot owners, backgrounders, farmer-feeder operators and ranchers. As always, I will enjoy getting out and visiting with producers instead of being holed up in my office in Omaha. It will also give me the opportunity to take an unofficial crop tour and see how the crops are progressing. Hopefully, I won't hit any pheasants with the company vehicle along the way.

Corn's historic price range continues to hold up well, particularly on breaks into the lower third of the range.(DTN chart by Darin Newsom)

This week's column is a byproduct of my presentation in which I will look at what a "demand market" is and whether the demand-driven market for corn is alive and well. The definition of a demand-driven market is: Increases in demand that offset stable-to-growing supplies, creating higher price expectations over time. This is opposed to a short-supply situation where higher prices are short-lived and the market returns to its previous trading range.

One characteristic of the demand-driven market is increased demand (see, my college degree did come in handy). Prior to the official start of the demand market, noncommercial traders' net futures position varied extensively between net-shorts (largest level was 114,000 contracts in early 2005) and net-longs from 1992 until late 2005 when CFTC allowed changed its rules regarding position limits to basically double. Since that time, noncommercial traders have never held a net-short position, and the largest net-long futures position was 395,000 contracts in early 2007, almost double the pre-CFTC-ruling record-large position in early 2004.

On the physical demand side, total demand continues to grow with the July WASDE estimate coming in at an estimated record-large 13.25 billion bushels in 2010-2011, compared to the 2005-2006 marketing year when it was only 11.27 bb. It's interesting to note, feed demand has declined from 6.12 bb to 5.45 bb, while exports have fallen from 2.134 bb to a projected 1.95 bb during the same timeframe. Those of you who haven't been living under a rock know where the big increase came from: ethanol, of course, as total demand has grown from 1.603 bb to an astounding record-large projection of 4.55 bb for the 2010-2011 marketing year.

Another characteristic of a demand-driven market is stable to growing supplies. The large jump in ethanol usage offset the increases to production that have gone from 11.112 bb to a projection for a record-harvest of 13.245 bb in 2010. When looking at supplies, which are production plus ending stocks from the previous marketing year, they have grown from 13.24 bb in 2005-2006 to a projected 14.73 bb in 2010-2011. This leaves the stocks-to-use ratio at an extremely tight 10.3 percent, the lowest level since the 2003-2004 marketing year, meaning there is little margin for error in terms of 2010 production.

This interesting chain of events has led to a higher price range over time. Since September 2006, when the ethanol boom really took hold, the price range has been from about $2.90 to $7.50, with anything near $4.30 or above representing the top third of the market. Do you remember what the price range was from 2001-2005? If you said from $1.90 to $3.30, give yourself a gold star.

It's interesting to note, when the nearby contract reaches the lower third of the current price range -- this week that level was near $3.64 -- buying emerges from both sides of the market as noncommercial traders look at it as a value proposition and end-users see it as an attractive level to lock in supply.

Since the wild ride in 2007 and 2008 that saw the nearby contract on the continuous monthly chart reach $7.65 in June 2008 and then collapse to $2.90 by December of that year, the market has stabilized. The nearby contract has traded between $2.90 and $4.50 in a classic long-term sideways trend. In addition, futures spreads and basis have held relatively stable with no real spikes in either direction to point toward a supply issue.

Not only does corn remain entrenched in a "demand-driven" market, it continues to prove resilient. After moving into the lower third of its historic price range this week, contracts moved sharply higher Wednesday as the long-term sideways trend remains firmly intact. And with ethanol demand expected to stay strong, there is little question the "demand market" looks poised to stick around for some time.

John Sanow can be reached at john.sanow@telventdtn.com

(AG/SK)

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