By Jesse Greenwald,
an account executive at the Saskatoon office of MF Global,
Toronto, ON, Canada

http://www.mfglobal.ca/

Corn grown in the USA has traditionally been used to feed livestock or has been converted into corn syrup and used as a sweetener. No longer solely for eating, corn is increasingly being used in the production of ethanol and it is now considered an “energy commodity.”

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 United States 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 United States. Ethanol is heavily promoted by the powerful farm lobby, and is now subsidized 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, farmers this spring have planted the largest corn crop in the US since World War II. This phenomenon has depressed corn prices through much of the spring, 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.

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 American 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. Look out for good trading opportunities that may develop for this commodity in the future.

Jesse Greenwald is an account executive at the Saskatoon office of MF Global.
He focuses much of his analysis on the grain and energy commodity markets. In addition, Jesse watches the forex futures, livestock commodities and soft commodities such as sugar, cotton and coffee. If you would like to learn more about corn commodities contact Jesse Greenwald via the MFGlobal website.

The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Please carefully consider your financial condition prior to making any investments. MF Global Canada Co. is a member of the CIPF.

Published - July 2008