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A bidding war is heating up among users of corn in the United States as livestock feeders and ethanol makers scramble to lock in supplies before extremely low stocks run dry by this summer.
And it could escalate even more with any delay in harvesting the crop in the flood-ravaged U.S. South, or if China steps into the market to buy the grain held over from last year's harvest, as persistently rumoured.
Corn supplies are forecast to fall to their lowest level in 15 years this summer in the U.S., the world's top exporter of the grain. Those holding stocks, like commercial grain companies, could reap handsome profits ahead of the Midwest harvest in September.
But those who have sold corn they do not own, such as resellers, could face losses if they are unable to deliver.
In markets such as Decatur, Illinois and Clinton, Iowa, published spot cash corn prices have risen a few cents above CBOT July futures for the first time in several years.
Also, the average posted bid at interior locations for corn delivered in August is at a 5-cent discount to CBOT September futures. That's the smallest average discount in at least five years, said Cody Bills, a broker with Grain Hedge, a research firm in Bozeman, Montana.
But behind the scenes, brokers say middlemen and small users such as independent feed mixers have been paying much higher prices - 50 cents or even $1 above CBOT July futures.
"Most (eastern) Midwest corn sales are occurring well above published bids as end-users try to keep quiet what their need for corn is and where the market is," research company AgResource Co. said Tuesday in a note to its clients.
Corn supplies are typically tighter in the eastern Midwest than in the western section, and especially so this year after 2010 yields suffered from the weather.
"One hundred-plus (cents) over (CBOT futures), that knocked everybody's socks off," said Diana Klemme, vice president of Grain Services Corp, referring to a rumored purchase by an eastern feed mill recently.
SELLING WHAT YOU DON'T OWN
Such demand, coupled with concerns over rains delaying the seeding of the 2011 crop, drove corn futures on the Chicago Board of Trade to an all-time high of $7.83 US -3/4 a bushel last month. Prices then dipped below $6.60 by mid-May as Wall Street investors broadly shed commodity holdings.
Yet with summer corn shortages looming, firmer cash markets have helped CBOT corn claw back above $7.50.
Farmers have sold most of last year's harvest, and are clinging to the remainder until they grow more confident about prospects for the new crop, said Chad Hart, an agricultural economist with Iowa State University.
"They are hanging on to it for dear life," Hart said.
As a result, corn offerings from the country have shut down. And planting delays, due to excessive rains, have dashed hopes for an early harvest that might relieve tight supplies at summer's end.
The empty supply pipeline appears to have squeezed corn resellers - independent middlemen who make a living by matching buyers and sellers.
"When I pay 50 (cents) over, it's not because I can make money doing it. It's because I have sold something I don't own," said Roy Huckabay of Linn Group, a Chicago brokerage and research firm.
"I think some of these resellers have made a mistake of selling something they didn't own. That's the issue," he said.
COMMERCIALS HOLD THE ACE?
As of March 1, commercial grain firms owned a large percentage of the corn harvested last year in the U.S. Farmers held only 52 percent of the domestic corn supply, down from 59 percent a year earlier, the U.S. Department of Agriculture stated in its latest quarterly stocks report.
"The strong basis levels being experienced in many areas may reflect relatively small inventories remaining in the hands of producers," University of Illinois agricultural economist Darrel Good said.
But the big commercials such as Archer Daniels Midland, Cargill and Bunge are believed to have sold most of that corn to protect themselves from a drop in prices once the 2011 harvest begins this fall, traders said.
"With July corn (futures) trading at an inverse to the December, any elevator manager in his right mind is not going to own it. He is going to have it sold," Huckabay said.
WHO'LL WIN OUT?
It's hard to say which industry is best-placed to claim the last bushels of 2010 corn, but traders say ethanol plants seem to have the early advantage. Profit margins for ethanol refiners have been improving and government data showed production rose in each of the last two weeks, reversing a downward trend.
Feedlots in the western U.S. Plains also need corn, and unlike ethanol plants that can reduce their corn grind, livestock producers cannot slow their herds' food consumption when profit margins sag.
"Feed margins have come down, but if you have animals out there, you need to feed them," Klemme said.
Exporters are also in the mix. U.S. corn export sales surged to a seven-week high by May 12, even as flooding on the Mississippi River interrupted the flow of grain to the primary U.S. export terminals in New Orleans.
So who will win the bidding war?
"The market will determine who wants it the most" was the way Klemme put it.
But only time will tell.