December 2010 corn futures moved above $5 in mid-September, moderated in early October, and then moved sharply higher following the USDA's October Crop Production report.

The month of November started with new highs for that contract, said Darrel Good, a University of Illinois agricultural economist.

"Even though prices are at the highest level since July 2008, some analysts are projecting even higher prices, with $7 being a favorite target. The obvious question is: Why are higher prices needed?" he said.

The role of the corn market is twofold. First, corn has to be priced so that current supplies last until the next harvest. Second, corn prices have to motivate sufficient production in 2011 to meet needs during the 2011-12 marketing year.

The second objective is met primarily by directing acreage decisions in 2011. Corn prices continue to adjust as the market's assessment of the "right" price needed to meet these objectives changes. This assessment changes on the basis of unfolding information about the strength of demand and about corn yield risk in 2011.

"The issue of allocating current supplies is typically evaluated based on the pace of consumption relative to available supplies. If consumption is proceeding too rapidly, so that supplies are likely to be consumed before the next harvest, prices increase to slow the pace of consumption," he said.

If the pace of consumption is too slow, so that year-ending supplies will be in surplus, prices decline to encourage more consumption, Good added.

For the current marketing year, corn supplies are estimated at 14.382 billion bushels, and consumption is projected at 13.48 billion bushels, he said.

"Stocks at the end of the marketing year are projected at 902 million bushels. Year-ending stocks cannot realistically be reduced much below the projected level so there is little room for consumption to exceed the projected level."

Is there any evidence that corn is being consumed too fast? Feed and residual use of corn is the largest segment of U.S. corn demand, but the rate of consumption cannot be calculated until the release of the Dec. 1 Grain Stocks report on Jan. 12, 2011, he said.

"The USDA is forecasting a generous level of feed and residual consumption of 5.4 billion bushels. It is unlikely the pace of consumption exceeds the projected level.