Cargill CARG.UL said this week that it was delaying the announcement of its 2013 sweetener pricing, suggesting the agribusiness giant may be anticipating difficulty in sourcing corn.
The change in sentiment from a supply-induced panic to a period of demand uncertainty is already weighing on prices. From Friday through Tuesday, corn for December delivery on the Chicago Board of Trade (CBOT) fell 4.2 percent to post the biggest three-day drop since June 13, just days before traders first fixated on the drought.
From mid-June to mid-July, corn embarked on a remarkably orderly rally, surging for several days and then pausing for another push. Rarely did prices close at their daily maximum. Never did they fall more than two days in a row. For the past two weeks, however, they've just bounced around.
"The first phase is unidirectional, where the market goes into a little bit of a panic mode, trying to price the day-to-day weather," said Malinda Goldsmith, a partner at agriculture-focused and Dallas-based Four Seasons Commodities, where she oversees a $50 million portfolio that gained 10 percent in July.
"Then you get to a point where the demand gets to be destroyed. And the market gets more choppy. Then you get into a very volatile period, which is the one we're in now, where we have sharply higher, sharply lower prices."
She concluded: "Now it's going to get dicey."
Modeling demand for food is a tricky task in the best of times. It is generally regarded as largely "inelastic", meaning consumption tends to resist the effects of higher prices. Historical assumptions can provide a useful guide.
But the growing role of the ethanol industry ― which consumes 40 percent of the U.S. crop ― has introduced a new set of variables. Even setting aside the possibility that President Barack Obama could offer a waiver of ethanol blending quotas this year, corn traders must now take stock of New York gasoline prices, Brazilian sugar exports and ethanol credits.
"We really didn't have ethanol when we had this kind of a shortfall in production in the past, so how that sector will respond is something new," Good said.
"There's a lot of difference of opinion out there in how much corn will eventually get consumed for ethanol."
The USDA cut its forecast of corn use for ethanol in the 2012/13 marketing year by 400 million bushels this month to 4.5 billion bushels, the lowest in four years. At that rate, output would be short of the government's 2012 mandate of 13.2 billion gallons (50 billion liters).