In late June, corn prices were almost triple where they were a year earlier, an unprecedented rally sparked by fewer U.S. corn plantings and ongoing strong global demand. The December futures contract hit a record high of $7.97 per bushel on June 27, and corn prices seemed to be well on the way to the moon.

Fast-forward one month and December futures are hovering just below $6 after seeing their steepest decline in 12 years.

So what happened?f

On June 30, the rally was dealt a sudden blow when the government reported plantings were not as weak as initially thought. The U.S. Department of Agriculture forecast that U.S. farmers had planted 87.327 million acres of corn, up from their original estimate of 86 million.

The forecast still well below the 93.6 million acres planted in 2007, but it was a shock to traders nonetheless. They were betting heavy spring rainfall and flooding had interrupted U.S. corn plantings. The fresh USDA numbers showed that farmers, determined to make the most of high prices, would still find a way to get more acres planted.

Shorts were quick to enter the market after the higher-than-expected acreage report, and prices turned modestly lower. But another twist was in store.

On July 11, the USDA issued its supply-demand balance sheets. After raising the acres estimate for the corn crop at the end of June, it then cut the average corn yield to 148.4 bushels per acre from its June forecast of 148.9 bushels per acre. The result was a decline in the crop size estimate in July to 11.715 billion bushels, from the June forecast of 11.735 billion bushels, despite the increased plantings.       

However, offsetting the decline in production were signs that the high prices were indeed rationing demand, as estimates for corn used for ethanol production were lowered from 4.0 billion bushels to 3.95 billion bushels.          

Ethanol: A Question Mark?

The record high corn prices were negatively impacting the ethanol industry. Construction of three new plants was delayed this spring, and 12 plants went broke.

The ethanol industry was also under attack from a variety of sources, including livestock feeders, the governor of Texas, environmentalists and politicians, who blamed the rising cost of food on the renewable energy. Those against using corn to make ethanol blamed it for 75% of the increase in grain prices. Those who supported it said that it accounted for no more than 3% of the grain price increase. They blamed the improved diets and rising economic clout of China and other parts of the Third World, as well as weather problems, for driving the corn price to record levels.       

So who was right? No one can know for sure, but less-biased analysts felt that between 12% and 15% of the corn price rise was attributable to ethanol production.

Despite the ethanol industries problems, U.S. ethanol capacity hit 9.25 billion barrels in July 2008, up 45% on the year. Since June, many ethanol plants have been profitable and the recent decline in corn prices has enhanced the profitability of the plants.

The industry though is still facing a U.S. Environmental Protection Agency ruling in August that could roll back the law mandating a fivefold increase in the blending of ethanol into gasoline to 15 billion gallons by 2015. Texas Governor Rick Perry petitioned the EPA this spring to cut the mandate to half the current level starting this year.          

 Prev12Next