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.
Historical and USDA forecasted Corn prices per bushel
The USDA forecasts that most of the increase in corn demand is a result of use in ethanol production
Where corn is grown in the United States
[edit] What impacts the price of corn?
Corn prices have risen sharply -- nearly doubling in less than a year -- almost entirely because refineries are using corn to produce ethanol, a recently popular gasoline additive. 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 remain high or increase from current levels.
However, there are several different technologies in development which could be used to produce ethanol. Cellulosic ethanol uses enzymes and other processes to produce ethanol from waste plant matter, including grass and wood. One benefit of cellulosic ethanol is that it would allow refineries to produce ethanol with cheaper waste plant matter without diverting corn from the food supply. If cellulosic ethanol were to prove commercially viable, it would impact corn prices because corn would no longer be needed for ethanol production.
Biobutanol is a biofuel that could potentially compete with ethanol, although the technology to make its production commercially viable is still in development. Biobutanol is produced from soybeans rather than corn, and because it has a higher energy content than ethanol, it is more likely to be able to replace gasoline entirely. If biobutanol becomes a commercial success, it would reduce demand for ethanol and the pressure on corn prices.
As the price of corn increases, farmers increase the acres which they devote to corn production in order to take advantage of higher prices. This can reduce some of the pressure on corn prices, but can impact the price of other agricultural commodities, particularly soybeans which are grown in many of the same areas of the country as corn.
[edit] Which companies benefit from higher corn prices?
- Archer Daniels Midland and Bunge (BG) grow corn and as such benefit from rising corn prices as their crops command higher prices on the market.
- Monsanto and DuPont produce corn seed which is genetically engineered to have properties that make it ideal for ethanol production. They stand to benefit from rising corn prices because farmers will tend to increase the amount of corn which they plant and therefore the amount of cornseed which they buy.
- UAP Holding (UAPH) distributes fertilizer, insectiside, anti fungal, and other chemicals used in farming of corn. To the extent higher corn prices lead to a boom, especially if a new chemical comes to market which boosts yield, UAPH could benefit. The main hurdle will be canibalization, if farmers cease producing a crop that requires greater use of chemicals and start producing corn which requires relatively few and low levels of chemicals.
- Potash Corporation of Saskatchewan (POT) and Mosaic Company (MOS) produce fertilizer and benefit from high corn prices as farmers use more crop nutrients to try to increase yield.
- Deere & Company (DE), as the world's largest tractor manufacturer, benefits from biofuels regardless of which crop (corn, soybeans, other grains) is ultimately used for fuel.
[edit] Which companies suffer from higher corn prices?
- Coca Cola, Pepsi and other makers of non-alcoholic beverages are hit particularly hard by rising corn prices, as high-fructose corn syrup is the principal sweetener in many of the soft drinks these companies produce. These companies' bottlers, such as Coca Cola Enterprises and the Pepsi Bottling Group are also impacted.
- Heinz and other ketchup makers suffer when corn prices go up because high fructose corn syrup is key ingredient in ketchup. Corn syrup prices have shot up 25% for Heinz, effectively raising their ingredients cost by nearly 5% in quarter ending Aug 1, 2007. Only 2.8% of that increase was passed on to consumers via a price raise.
- Tyson Foods, Pilgrim's Pride (PPC), Smithfield Foods (SFD) and other livestock companies use corn as animal feed. When corn prices go up, it becomes more expensive for them to raise animals, squeezing their profits.
- Kellog, General Mills and other cereal companies can be hurt by rising corn prices, however, wheat is a far more common ingredient in cereals and changes in wheat prices are more likely to impact these companies than changes in corn prices.
- Kraft foods and other snack food companies whose snacks are made from corn or high fructose corn syrup can be hurt by rising corn prices.
- UAP Holding (UAPH) distributes fertilizer, insecticide, anti fungal, and other chemicals used in farming. The main hurdle will be canabalization, if farmers cease producing a crop that requires greater use of chemicals and instead start producing corn which requires relatively few and low levels of chemicals. This was discussed on the 3rd quarter 2007 conference call.
- Hormel Foods (HRL), Tyson Foods (TSN), and Sanderson Farms (SAFM) are hurt as corn prices rise. Corn can be a significant input in the production of meat products as it is used for the feed of hogs, chicken, cows, etc.
[edit] Corn Futures
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 (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.
- The following chart shows the current spot price for corn - the price in cents per bushel to purchase corn for delivery in September 2008.
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