Corn is the most widely produced feed grain in the United States, accounting for more than 90 percent of total production. Around 80 million acres of land are planted with corn. The majority of the crop is used as livestock feed; the remainder is processed into a multitude of food and industrial products including starch, sweeteners such as high fructose corn syrup, corn oil, and ethanol for use as a fuel. As corn prices rise, agricultural companies stand to benefit as their corn or corn seeds command a higher price in the market. Companies who buy corn or derivative products such as high fructose corn syrup can be hit with much larger costs when corn prices rise.
Corn prices - which usually means the price of corn futures - are intimately tied to energy prices, because corn is used to make ethanol, an additive in gasoline. Corn prices peaked in June 2008 with the Iowa floods - at around $7.88 / bushel, then fell in late 2008 and early 2009 as commodity prices - and in particular oil prices - declined, a result of a slowing economy brought on by the 2008 Financial Crisis.
Demand for ethanol may be destroyed by the development of a cheaper biofuel. One alternative recieving both attention and research dollars is cellulosic ethanol, made from plant-based materials like wood and grass. The close to one billion dollars of Obama’s stimulus bills spent on advanced biofuels research will make these alternatives more viable, but will also likely increase demand for ethanol as a whole.
Demand for ethanol is also driven by government regulations requiring a certain percentage of fuel to be made of ethanol. Several large states, like New York and California, have put that percentage at 10%.
Analysis from the International Food Policy Research estimates that rising demand for ethanol caused 40% of the rise in corn prices from to 2007, and analysis from the CBO estimates that rising demand for ethanol caused 35% of the rise in corn prices in 2008. This is because rising demand for ethanol directly translates into rising demand for corn, at least until alternative biofuels become more price competitive. Demand for ethanol is directly related to the ratio between oil and corn prices – how much ethanol can be sold for (essentially the price of oil) divided by the cost to acquire corn (corn prices). If this ratio is higher than 90%, manufacturers will earn enough money to cover the cost of building an ethanol plant and to use it. However, governments across the world have implemented subsidies that make it profitable to produce ethanol even when that ratio is below 90%.
The price of oil depends on supply and demand. Factors affecting demand include:
Factors affecting supply include:
Ethanol is an example of a biofuel -- a fuel produced from agricultural products rather than extracted from the ground like oil. Because Ethanol is "grown" as corn rather than pumped out of the ground, it is considered a form of renewable energy. Because ethanol can help conserve gasoline and reduce air pollution, several states, including California and New York, require that gasoline contain 10% ethanol. Legislation is pending in a number of other states. If the number of states requiring ethanol as an additive increases, or if the amount of ethanol that gasoline must contain increases, ethanol demand and therefore corn prices will increase.
Government regulation in the U.S. has further buoyed corn prices. A tariff on imports of Brazilian ethanol, which is made from sugarcane, has increased demand for domestic, corn-based ethanol.
Corn based ethanol is the most widely used biofuel because it is the cheapest. There are many contenders wishing to take corn's place, including alternative feedstock like sugar cane and grass, as well as trees and sugar beet. The close to one billion dollars of Obama’s stimulus bills spent on advanced biofuels research will make these alternatives more viable, but will also likely increase demand for ethanol as a whole.
The value of the dollar effects the price competitiveness of U.S. exports of corn. The depreciation of the dollar from 2006 to 2007 cause exports to rise 14%, which cause domestic corn prices to increase.
Approximately half of corn produced in the U.S. is used for animal feed. As living standards in developing countries increase, demand for meat increases, which increases demand for animal feed, which is made in part of corn.
The weather, in large part, determines the supply of corn. Particularly wet or dry seasons limit production, which in turn causes corn prices to increase. Conversely, when the weather is nice and crop yields are abundant, the price of corn decreases.
The USDA forecasted in mid August that corn production for the 2009-2010 marker year will be 471 million bushels higher than expected a month ago, to 12.8 billion bushels. After adding stockpiles from last year, the market year's total domestic corn supply is expected to rise to the highest level on record - 14.5 billion bushels. This in turn is expected to push down prices to $3.1 to $3.9 a bushel, about 7%-8% lower than the forecast made in July.
Corn prices usually refer to corn futures - the price to buy a bushel of corn to be delivered on a specific date in the future. The most commonly tracked corn futures are those on the Chicago Board of Options Trading, or CBOT. The CBOT tracks corn futures contracts by delivery date. IE, the price of corn to be delivered in September of 2008 might differ from the price to be delivery in December of 2008, so there are different corn futures prices to track - one for each delivery date. The CBOT tracks corn futures for only five different delivery dates a year - in March, May, July, September and December (the last is known as "winter corn"). The spot price for corn is what it costs today to buy corn for delivery at the next possible delivery date. .......