What’s Going on in the Crazy Corn Market?

So much for transitory inflation as corn (NYSE:CORN) prices are again pennies of a fresh all time high. Last week an update by the USDA showed that corn stocks will come in much lower than expected at the end of the 2011/12 marketing year at just 695 million bushels: this is far lower than the analysts consensus of 771 million bushels.

The spring weather was blamed for the drop: “cold, rainy spring and flooding cut U.S. corn plantings by 1.6 percent, will reduce the harvest by 2 percent and will keep U.S. corn supplies at their tightest level in 15 years through the fall of 2012, the government said on Thursday.” Another factor for the record price: surging China (NYSE:FXI) demand: “USDA also forecast a hefty increase in corn use by China — up 8 million tonnes, or 5 percent, this year and up 13 million tonnes, or 8 percent, in 2011/12. China will draw down its stocks rather than import corn, USDA said.”

Just like in China (NYSE:FXI) where record droughts have been replaced with deadly floods, the weather continues to be unusually volatile, not just in the US: “Besides plaguing the eastern Corn Belt, rains and floods have slashed the rice crop by 5.5 percent since May, USDA said. Drought in the Southwest would reduce the cotton crop by 1 million bales, or nearly 6 percent, to 17 million bales, and the rice crop, at 199.5 million hundredweight, would be the smallest in four years.” This is probably the latest data the market needed to completely ignore today’s worse than expected initial claims data, and go into full “Inflation: ON” mode. In other news, expect Obama to announce the launch of an Adverse Weather Task Force investigating speculative movements in air masses momentarily.

More from Reuters:

USDA projected the corn crop at 13.2 billion bushels, a record but 305 million bushels — 2.2 percent — lower than its May estimate. With high demand from ethanol makers, livestock feeders and exporters, consumption will exceed the harvest and the U.S. stockpile will shrink.

Traders said corn futures prices would rise by 10-20 cents a bushel because of the forecast of tighter supplies.

“USDA must feel comfortable we are going to lose acres, based on satellite (imagery),” said Jack Scoville, analyst for The Price Group. “We know we’re going to lose the acres; it just depends how much. They didn’t put them in beans.”

The corn stocks to use ratio, a measure of supply, would be 5.4 percent this marketing year and drop to 5.2 percent for 2011/12. Both are close to the 5 percent ratio of 1995/96 and represent razor-thin supplies.

“Planting delays through early June in the eastern Corn Belt and northern Plains are expected to reduce planted area, more than offsetting likely gains in the western Corn Belt and central Plains where planting was ahead of normal by mid-May,” said USDA.

It projected corn plantings of 90.7 million acres, down 1.6 percent from farmers’ intentions, and harvest area of 83.2 million acres, down 2.2 percent.

USDA estimated the winter wheat crop at 1.45 billion bushels, up 2 percent from May. Traders expected a 2 percent drop. “Improved weather conditions during the past month in the upper Great Plains resulted in higher forecasted yields,” said USDA.

Blame the evil speculators for the chart below:

Tyler Durden is the founder of Zero Hedge.