Friday, April 23, 2010
Will Corn Prices Follow Energy Policies Or Commodity Policies?
Corn prices have been increasingly responsive to the biofuels market, since about one third of our corn supply is refined into ethanol. After all, the various state and national organizations that promoted ethanol as a new market for corn were hoping that an increased use would support higher market prices for corn. Over the past 30 years ethanol has been consuming an increasing amount of corn and corn prices are higher, but we are also producing twice the amount of corn that we produced 30 years ago. Looking ahead, what will happen to commodity prices as ethanol reaches its maximum blending limit of 10% of the total motor fuel consumption? And what will happen to commodity prices as biofuels prices grow more closely linked to the price of oil? Interesting questions, and we have the answers.The corn economy used to be completely independent of the oil economy. But when ethanol began to influence corn prices and when ethanol pricing was linked to that of unleaded gas, the correlation between corn prices and oil prices drew closer together. That is history. But the future could see more linkage say Purdue economist Thomas Hertel and USDA economist Jayson Beckman, whose research addresses many of the issues that corn growers are wondering about, along with producers of other feed grains, producers of other crops that compete for acres, and about everyone in the Cornbelt, along with livestock feeders.
From 2001 to 2007, the correlation between oil and corn prices was .32, in other words, not much. But 2006 was a turning point in the ethanol market when MTBE was banned as an additive and ethanol had to shoulder the burden of being the sole oxygenate and octane enhancer. When oil prices pushed above $75 per barrel the correlation between crude oil prices and corn reached .92, in other words, they were nearly in lockstep. Corn was about 5% that of oil prices and the price of oil was dominating ethanol and corn prices, instead of ethanol and corn being influenced by federal mandates for using increasing amounts of ethanol in the fuel supply.
Hertel and Beckman say the advent of the recession brought oil prices down and mothballed ethanol plants, but at the end of 2008, the federal Renewable Fuels Standard (RFS) mandated production and blending into gasoline, despite the cost. Instead of being market driven, the use of ethanol and the price of corn were being mandated by the RFS. But early in 2009, changes in oil prices and ethanol production costs shed off the mandates of the RFS, but the 10% “blend wall” became a dominant market force. The economy was curtailing gas consumption and even though the US corn ethanol industry was not at maximum production of 15 billion gallons, the lower amount of gas consumed meant the lower level of ethanol being supplied was pushing against the 10% blending limit. Surpluses of ethanol began to develop and with a falling oil price the correlation between corn and oil prices began to diminish toward the 50% mark.
The economists say their calculations show that, “When compared to the 2015 base case, corn price volatility in the face of the very same supply side shocks is 57% greater. We see that global price volatility is much increased under this scenario, rising by about one-quarter. Clearly binding energy policies have the potential to greatly destabilize agricultural commodity markets in the future.” They report that with a mandate to further increase biofuels production in the US, the relationship between agricultural and energy commodities may grow even stronger. They believe that the RFS can hinder ethanol’s ability to react to low oil prices, and that would destabilize commodity markets, which would also happen with the 10% blending wall now, or with a higher blend percentage in the future.
The bottom line, they say is that no biofuels policy leads to corn prices responding to the price of oil, but not corn production. If there is either an RFS or a blend wall, but not both, energy prices have a smaller impact on corn prices, but corn production will have a larger impact. Finally, with both RFS and a blend wall policies in effect, US grain price volatility is 57% higher than without the policies, and world grain price volatility is 25% higher. They think that grain prices will depend more on the biofuels industry than on USDA commodity policies.
Summary:
Ethanol has had an increasing influence on the price of corn, and in recent years, the ups and downs of oil prices, the recession, and the amount of ethanol being required for the US motor fuel supply has allowed a look into the future. The Renewable Fuels Standard and the 10% maximum for ethanol blending have a combined effect of creating increased volatility for corn prices, compared to scenarios with only one policy or without any policy. In the future, the price of corn may be determined more by the biofuels economy than by US commodity policy.
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Posted by Stu Ellis on 04/23 at 01:17 AM | Permalink