October 06, 2008

Ethanol Production Rising, Corn Prices Falling

The University Of Illinois Extension had an interesting post the other day.

In the past 90 days Dec corn has dropped over $3 and Nov beans have dropped over $6.50 per bu. and marketing specialist Mike Woolverton at Kansas State says supply and demand fundamentals had almost nothing to do with it. He says it was all a function of the financial markets, because of the housing bubble and the subprime mortgage issues.

The financial companies which assumed the risk in those troubled areas also ran hedge funds and index funds, and Woolverton says when they were unable to liquidate mortgage assets, they had to get cash by offsetting futures and options contracts at large losses. That took billions of dollars out of the commodity market, reducing grain prices.

December corn futures closed the day at $4.24 per bushel on CBOT.

The thing that strikes me about this is that ethanol production is still rising while corn prices are going down in a rather dramatic fashion. And while the critics of ethanol would have us all to believe that ethanol was the sole cause for high corn prices and high food prices this seems to show that speculation was a large part of the problem.

But regardless of the reasons for falling corn prices, since we have been told that egg, milk, beef and chicken prices among others were rising because of high corn prices, shouldn't we be seeing these prices come back down?


Unknown said...

I didn't realize that corn prices were dropping now. Interesting that ethanol production was blamed for high corn and food prices.
Goes to show how much control the commodity speculators have over the market and prices.
Great blog!

Michael A. Gregory said...

Thanks. Yeah corn prices have come down quite a bit since they reached a high of almost $8 per bushel following the flooding in the midwest earlier in the year.

Corn prices at the close on Friday were at $4.08 and are trading at the moment at $4.17 on CBOT.

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