The recent behavior in the corn market suggests that the long-run view has to be tempered with short-term dynamics. Corn like other grain markets will be affected by the weather. There can be strong demand for a market, but if supply grows faster with better weather conditions, it will drive the price in the short-run.
The key story driving the corn market in the last year has been ethanol. This story hit a fever pitch just before Spring planting. The price of unleaded gas has increased more than expected which had further stoked demand for corn, although the price has declined in tandem with corn since mid-June. The amount of production from new ethanol plants is strong with capital expenditures responding to government subsidies. Corn demand for ethanol is now greater than the amount for exports.This demand story may have taken on the dimensions of a bubble in some parts of the Midwest. One agricultural economist suggests that 40% of the increase in corn prices in the last year has been due to ethanol demand.
This strong expected demand provided an opportunity for corn farmers to make extra income through crop switching to corn production. The result was the largest corn planting on record and exploding prices. From a year ago corn prices increased over $1.30 per bushel for the front-month futures contract, a 33% change in prices to their highs in mid-June of $4.32 per bushel.
Yet, in less than a month the price has fallen by over a $1 per bushel on weather patterns which have been almost perfect for growing. The strong plantings with favorable weather conditions which increase yields mean that we may see a bumper corn crop. The logistics of producing ethanol to take on this extra supply may prove harder than originally thought. Regardless of what some may think about the long-term demand, grain prices are still driven by short-term weather.
No comments:
Post a Comment