What drives corn prices?
In a nine-page paper, two Growmark analysts say the ethanol effect, while obviously dramatic, is not the only, and indeed, not the biggest factor in the increase in corn prices. By Susanne Retka Schill | February 04, 2013
Two analysts with Illinois-headquartered regional farm cooperative Growmark, Kel Kelly and Scott Hornblower, have tackled an important issue to ethanol industry in a recent paper: “4 Reasons Why Ethanol Doesn’t Drive Corn Prices – A Tale of Two Forces.” In the nine-page paper, the two authors say the ethanol effect, while obviously dramatic, is not the only, and indeed, not the biggest factor in the increase in corn prices. Kelly and Hornblower lay the case that investment flows channeled into the corn market by investors/speculators has the larger effect. Yes, the ethanol industry does consume around 5 billion bushels of corn annually. “It might seem obvious that the increased demand for ethanol would have had some effect on corn prices,” they write. “The question, however, is exactly how great that effect has been. Our research suggests that the ethanol industry has had only a very minor effect on the price of corn.” The first reason they give is that ethanol demand is relatively small. “According to our calculations, as of 2012, the increase in ethanol demand over the last 12 years could have driven corn price up by a maximum of only $1.68 per bushel from the price of $1.85 in 2000.” One of the things they looked at to reach that conclusion was who spent money in the corn market and what happened when the corn market tanked. Ethanol’s share in the increased spending for corn amounted to about 44 percent of the total, they said. “The fact that corn prices fell substantially while ethanol demand remained strong proves that it was the larger spending by other market participants, not the smaller spending by ethanol buyers, which had the dominant effect on corn prices.” That analysis leads to their second observation:...
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