February 1—The market made a new three-month high on the first day of trading in 2006 at $2.21 and then promptly started a break the next day that took prices down to $2.03 ½ by the end of the third week. The buildup to the high at $2.21 came from the anticipation of index fund buying. The break came from the "lack of" index fund buying in early January. Also contributing to the break in prices was the increase in carryout in the USDA's January report. The last seven trading sessions of the month were marked by a new round of fund buying. The funds pushed prices to $2.22, a new monthly high on Jan. 30 before closing the month out at $2.18 ¾.

The USDA increased the final production figure by 80 million bushels in January. At the same time, the carryout increased 7 million bushels versus previous estimates. However, this year's carryout is now 312 million bushels larger than a year ago. This led to a carryout-to-use ratio of 22.4 percent compared to a 19.8 percent carryout-to-use ratio a year ago. Just two years ago, the carryout-to-use ratio was 9.3 percent. Ethanol corn demand is expected to use 1.575 billion bushels or 11.9 percent of the total corn supply. This compares to 1.323 billion bushels or 10.4 percent of the total corn supply a year ago. Feed demand went up from 5.875 billion bushels to 6.0 billion bushels, a 125 million bushel increase, while export estimates dropped 50 million bushels to 1.8 billion bushels. World carryout projections increased from 118.74 million metric tons to 128.27 million metric tons. Beginning world stocks and world production increased with Chinese production up 4 million metric tons.

Prices should be volatile this summer amidst any weather concerns and the question of what index funds will do in the marketplace. Nearby futures should be range-bound; however, a wide trade range may be expected as the funds enter and exit the market.