Supply, Demand and Pricing

Who is familiar with corn market? Who cares about corn production, price, and its implication on producing biofuel? Not all of us but there are some people that are very interested in this market and they have a good reason for that: corn is the star

on grains market . There is a growing demand for corn because the U.S. Department of Energy (DOE) and the U.S. Department of Agriculture (USDA) are both strongly committed to expanding the role of biomass as an energy source. In particular, they support biomass fuels and products as a way to reduce the need for oil and gas imports and to foster major new domestic industries — biorefineries — making a variety of fuels.

Corn is a grain that is used mostly for food, it can be food for humans and can feed animals but lately it has another use – is used to produce biofuel and the amount of grains used to produce fuel is exploding. Corn importers like Japan, Egypt, and Mexico are worried that a reduction on US corn export will ruin their livestock and poultry industries. At the stock market, corn is trading at 10 years highs and the predictions are that will continue to grow. This prediction is based on the emerging competition between 800 million automobile owners who want to fuel their cars to maintain their mobility and the 2 billion poorest people in the world who wants to just have food on the table for their families. Thinking a little further, we can say that if the corn price keeps increasing food riots and political instability in countries as Indonesia, Nigeria, Mexico could disrupt global economical progress. Escalating competition for the US corn crop drives up the price for it. Beside external competition it cannot be ignored the local competition of traditional feedlots, dairies, pork, poultry and egg producers who will have less corn available for their farms and at the end they will have to increase their prices on the meat market.

As we can see starting from corn, its price and its new use for producing ethanol, which further is the biofuel, used to replace oil we came to understand that a shift in a single product on the market could produce a huge wave on other markets. Corn was a grain that was subsidized and has it price regulate by the state but since it can be used for fuel production the investment in this crop is driven by the price of oil because the conversion of agricultural commodities into fuel become hugely profitable.

The huge profits from converting corn into ethanol following the late 2005 oil price hikes led to a switch toward building more distilleries to produce biofuel. A demand for corn will increase the price which will make more people to switch acreage to corn from soybeans, wheat and even cotton to cash in on the higher prices. All farmers will see this as an opportunity and they will not loose it.

At this point in time, there is questionable how much corn production will increase because the predictions are that many landowners will produce corn in detriment of wheat, soybeans and rice.
The corn-to-ethanol conversion rate is 2.7 gallons per bushel and that means a lot of corn to be produce to cover the biofuel needs of USA in order to keep the crud-oil price at a low rate. The highest factor on ethanol production is the high oil prices, which lead to greater interest in ethanol production and thus, higher corn prices. If the oil price goes down then the demand on producing ethanol will reduce the urgency to produce more ethanol and the corn price will fall, so the demand curve will change its trend.

Looking at the map we can see that ethanol sector is adding over 2 billions gallons to its capacity. There is a hope that one-third of the corn byproduct that emerges from the distillery as distillers grain will offset the loss of corn for feeding but how we will offset the loss of corn for food? I wish to have the answer.

Who would have thought that corn would become highly traded at the stock market? Hard to say that but it is clear it is in great demand and it will be for years to come. A shift in use – from food to fuel- and corn is the star. The demand for biofuel will increase and with the increase awareness for protection of our environment, the biofuel represent a good alternative.

References:
Hagen, Barbara – Corn has deep economic roots- USA Today-01/25/2007 – retrieved from
EBSCOhost on March10, 2007
Truini, Joe – Food vs. fuel? – Waste News –01/22/2007- Vol 12 Issue 19, p 3-21 – retrieved
from EBSCOhost on March11, 2007
http://www.ers.usda.gov/AmberWaves/Scripts/print.asp?page=/April06/Features/Ethanol.htm

All Rights Reserved Theme by 404 THEME.