Ethanol is corn's food for thought
TOKYO (MarketWatch) -- A flailing economy and record crops have worked to pull corn prices some 20% off their 2009 peak, but analysts say the move's only a temporary setback with an economic recovery underway and ethanol demand on reliable footing, ready to lend a hand.
"Nearly a third of the domestic corn output in the U.S is being used for ethanol production and this volume is set to expand even further going forward," analysts at Commerzbank wrote in a recent research note. "This should push up prices."
Ethanol, which is made primarily from corn in the United States since the nation is the world's largest producer and exporter of the crop, is a fuel additive used in reformulated gasoline.
Asia's Week Ahead: Full Economic Slate
An important question remains about whether China will continue moves to tighten its lending. Other items on the agenda include vehicle sales in Japan and an rate decision in Australia. MarketWatch's Steve Gelsi reports.
And "this year, 12.95 billion gallons of renewable fuels are mandated to be used in fuels sold in the U.S., up from 11.1 billion gallons in 2009," said Brian Milne, refined fuels editor at Telvent DTN.
While that mandated demand will not be satisfied exclusively by ethanol, "demand for ethanol will continue to rise with the mandate, which runs to 2022," he said.
Corn for use in ethanol production has already increased nearly fivefold from the year 2000 to 3.6 billion bushels in 2008, according to the National Corn Growers Association, which used preliminary data for 2008.
It wasn't too long ago that ethanol demand was actually outgrowing corn and risked -- maybe even succeeded -- sending prices for corn and its byproducts, including feed for cattle, to unreasonable levels.
Renewable fuels got a "bit ahead of themselves in the public eye in 2008 when gasoline was over $4 a gallon and the race to biofuels was on," said Chris Kraft, president of Nashville, Tenn.-based CKFutures.com. "High fossil fuels lead to high demand for ethanol, which lead to historically high grain prices, which made ethanol as expensive as gasoline."
In 2009, corn continued to be supported by expectations of increased demand for ethanol as well as difficult growing and harvesting conditions that year -- "too much rain followed by early cold and snowfall before all the crops were harvested," said Milne.
Forecasts of a bumper corn crop have combined with the downturn in the nation's economy and falling oil prices to withdraw some of that support.
Stocking up
On Jan. 12, the U.S. Department of Agriculture raised its estimates on the nation's corn crops by 2% from its November forecast to a record level of 13.2 billion bushels. That's 1% above the previous record set in 2007, the USDA report said.
Prices sank more than 7% the day the report was released and posted subsequent declines in eight of the 11 sessions thereafter.
"Corn has been the darling of the funds and the focus of re-allocation of monies ... in the first week of January," according to a report from commodity broker and researcher Linn Group. "Stats had been mildly supportive also -- at least a bull case could be built."
But with the latest USDA production and usage report, "that story has evaporated," the report said. "We ... look for a year of deteriorating corn prices with only strong energy prices to help stabilize this market at reasonable levels."
Comments