Sunday, October 23, 2011

Ethanol tax credit and market behavior

The corn market is going to change in just a few weeks. The ethanol tax credit is worth about 54 cents per gallon for ethanol producers. Ethanol now takes up 40% of the corn crop, so as goes gasoline and ethanol so goes corn. It is likely that the credit will expire at the end of this year. Ethanol producers are doing what is expected. They are producing as much ethanol as they can before the tax credit expires. This has placed strong short-term pressure on corn from these consumers.  Current gasoline futures only trade at a penny premium to ethanol versus 35 cents for next year. The tax credit represents an increase in corn prices of about 16 cents per bushel. If this demand declines, there will a price decline just when farmers are making their planting decisions. We will see a combination of less demand and more supply. This is never a good combination of price increases.

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