Saturday, October 25, 2008

Corn prices now directly linked to oil prices

I caught this bit at a link from Instapundit.
Ethanol producers are jockeying for a seat on the increasingly crowded bailout bandwagon. Just last Friday, the U.S. Department of Agriculture Secretary Ed Schafer addressed the plight of those poor, poor businessmen who got locked into the cost of corn this summer. Just like oil and natural gas, the current price is half of what it was at its peak.
I had not realized that corn prices had crashed since this Summer's peak. Here's my graphic overlay of corn and oil prices.

I have not asked the Wisconsin ethanol producers for their opinion, but to my eye, corn prices now (since December 2007) march in lockstep with crude oil prices (you may click any of the graphs for an enlarged view).

Stew on that one for a while ... OPEC now controls the price of your Frosted Flakes.

Contrary to this WFBL claim ...
ETHANOL helps ease gas prices.
With gas prices projected to be more than $4.00 per gallon this year, the use of ethanol-blended fuel usually lowers gas by 15 cents per gallon. It’s not a great savings, but every little bit helps with oil production controlled by OPEC and large oil companies making large profits

Ethanol does NOT ease gas prices, oil prices set ethanol and corn prices.

The fact is that corn prices are now arbitraged to oil prices. This is true solely because corn is used to produce ethanol. This was not the case just one year ago, but it is now. What has changed is that there is now excess ethanol production capacity in the U.S.

Because of this excess capacity, ethanol producers must compete for limited corn resources to produce their product. As oil prices rise, the price for corn will increase because these ethanol producers will bid corn prices up to chase the opportunity for increased profits.

This ain't just me speculating anymore. Here is your proof.

Weekly Light Crude Oil Prices, NYMEX

Weekly Corn Prices, CBOT

Weekly Oil versus Corn Prices

I think the next graph is particularly interesting. I pasted the commodity price of ethanol over the corn and crude oil graph. It shows that prior to October 2007, ethanol was selling at a premium to the cost of the raw material (corn) and energy (oil or natural gas) used in it's production.

This profit premium created an ethanol gold rush as everyone and his brother (So how's the ethanol business going Luther?) decided to build an ethanol plant. As a result, windfall profits are no longer available from ethanol production and many of these new distilleries are failing.

Weekly Oil versus Corn versus Ethanol Prices

Today's Question - When you fill your tank with that $2.50 gasoline, does it feel like you're stealing the shit?

I think I'll get me a really big SUV!

Updated 6/2/09 - The relationship still holds.


Dad29 said...

Good Stuff!!


Headless Blogger said...

Thank you. I had a ball researching and writing this one.

Renegade Division said...

Headless blogger, if you take a chart of weekly rice prices, oil prices, corn prices, ethanol prices(or any internationally traded commodity) you will find they all had a major peak in 2008 summer.

The reason weren't some sort of freak accident, but a common reason explains them all and that is that it was a dollar influx in the market.

These commodities are traded in dollar, a continuous influx of dollars create a rise in price of these commodities which give the market an impression that there is going to be a huge shortage of those commodities, speculators start to buy these commodities and soon there is a crack up boom price bubble, and it keeps on going until the bubble cannot sustain itself anymore

Headless Blogger said...

Renegade Division - Help me find that peak:

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Viagra said...

I wonder why they are so closely linked at the moment.