Cash & Liquidity ManagementInvestment & FundingInvestment ManagementGrowth of Corn Commodities

Growth of Corn Commodities

The price of corn commodities rallied earlier this year, due to many bullish factors. One of the most significant factors is the fact that the global dependence on energy from fossil fuels is continually being challenged. Geopolitical risks in oil-producing countries, conflicting estimates on the sizes of oil reserves, the environmental movement and the farm lobby in the US have put biofuels in the spotlight – benefiting the grain commodity markets.

Whether you agree with the economics of corn-based ethanol or not, production capacity is being expanded in the US. Ethanol is heavily promoted by the farm lobby, and is now subsidised by the US Congress. The 2008 re-election campaign figures into this equation heavily as this lobby group represents significant votes in the US.

The growing demand for agricultural commodities, including corn, in the coming years will create an upward pressure on corn prices. In response, in 2007, farmers planted the largest corn crop in the US since World War II. This phenomenon depressed corn prices through much of the early part of 2007, as a bumper crop on this much acreage was thought by many traders to be more than enough to meet the ‘feed and fuel’ demand.

The grain markets were very volatile over the recent growing season. As traders try to determine farmers’ planting intentions for the coming season, prices could remain jumpy. A further decline in the US dollar could also inflate prices, as US grains will be less expensive to customers around the world.

Market Volatility

Long-term threats to corn prices do exist, despite the increase of demand due to the production of ethanol. Should food inflation get any worse, the cries of consumers may gain the ear of politicians now in the farm lobby’s pocket. Subsidies for the ethanol industry could be cut in the future. In addition, tariffs currently preventing sugar or cheaper Brazilian ethanol from entering US markets could be lowered or removed altogether. Many experts agree that sugar-based ethanol is cheaper and more efficient than its corn-based counterpart. Finally, biomass ethanol technology could be perfected, allowing cheaper ethanol production from corn stalks, switch grass or organic waste.

These factors however do not threaten corn in the near-term and in the short-term even a bumper crop will only depress prices so far. Corn commodities may be one drought away from another bull run and remains an interesting commodity to watch over the next few months.

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