In September, corn on the Chicago Mercantile Exchange suffered a month-long plunge that resulted in a $2 per bushel drop from $7.80 per bushel at the beginning of the month for the December 2011 contract down to $5.80 by the end of the month. While the fall in corn price was good news for the poultry industry, the question has to be asked, what was the corn market saying in September?
The timing of the drop was curious coming as it did before details of the fall harvest were known. The fall in corn prices was, therefore, not related solely to supply issues. Corn did not fall due to a suddenly better prospect for the harvest, since the harvest was not known and furthermore, what was known about the harvest was that it would be a poor harvest.
Demand destruction for corn at $8 a bushel
If it was not supply driving prices in September there is only one other possibility – demand. The market, in its fickle wisdom, called into question the sustainability of demand for $8 corn. The verdict was: that dog won’t hunt. A sustained period of $8 or even $7 corn would have accelerated the decline in meat production that was already taking place in the U.S. The demand for corn used for ethanol, corn sugar and exports were all in the process of being eroded. Demand destruction pulled the rug out from under the corn market.
Economic weakness lingers
In addition to concern about demand destruction, another factor at play in September was the possibility of a double-dip recession. Until recently, the consensus opinion among economists was that growth would be disappointing in 2012 but that there would be no second recession. However, there appears to be an increasing chance of a slowdown in 2012 because of the potential of the sovereign debt problem in Europe to spin out of control. The world economy may have to wait until 2013 to begin a sustained recovery. Slow growth of 2% next year, although disappointing, would still be far better than the 2% drop in 2009. Presumably the world will sort out economic issues by 2014 at the latest and resume growth of 4%.
Falling corn prices are both good news and bad news for the poultry industry. The good news comes in the form of a lower cost of production. The bad news – sluggish economic growth – may suppress demand. By 2014, when the world economy presumably heats up again, chicken and corn prices may well rise together.