It was not long ago that producers were looking at 2012 corn futures near $8 per bushel, a price level that was unsustainable despite record livestock prices.

Since the end of August, December corn futures have declined $1.80 per bushel or 23 per cent. March and May corn futures are also down by a similar amount. So what has prompted the pullback in corn futures and what does this imply for US livestock production and prices in 2012?

It appears to us that the retreat in the corn market reflects the impact of two main drivers: First, corn demand has been disappointing to this point. The latest USDA weekly export sales report showed net corn export shipments for the period 18 - 24 November at 280,600 MT, while last year net exports for the comparable week were 758,000 MT.

Weekly net export sales have been trending lower for the last few weeks (see chart) and this has some market participants questioning whether USDA will further reduce its corn exports estimate in for the 2011-12 marketing year.

The last WASDE report kept export demand at 1.6 billion bushels, the same as the October estimate. Large world corn importers, including Japan but also China, have been pulling back on their orders. Some have increased their use of feed wheat as offers appear to be blow US corn values.

Instability in currency markets also has been an issue. As for the other two major corn demand drivers, feed and ethanol, the picture is mixed.

Broiler producers have been cutting back sharply and this will have a negative impact on overall feed use. We also continue to hear of some substitution of feed wheat for corn in areas where the basis allows for this.

Ethanol demand, on the other hand, appears to be in good shape. Crude prices near $100 per barrel and lower corn prices will likely push ethanol corn use higher in the coming weeks.

The second issue impacting corn futures has been the ongoing instability in outside markets, particularly the possibility that Euro zone leaders may not be able to find a way out of the current crisis. This has led some market participants to limit their risk exposure.

Markets have been trying to price in the risk of a looming financial and debt crisis in Europe since summer but the issue has taken on more urgency in the last few weeks. Until some resolution has been found, agricultural commodities will remain under pressure, including corn. In our view, the decline in corn prices will have a more immediate impact on hog production as even before the recent pullbacks producers were looking as modest profits for 2012. Some producers have been chomping at the bit to expand and this pullback may provide the opportunity to do so.