Corn prices will continue to rise

Corn futures on the Chicago Board of Trade have almost doubled since June last year. But a combination of relatively low stockpiles, a bad growing season and demand for corn-based ethanol, look set to propel them even higher.

Luke Chandler, global head of agricultural commodities for Rabobank, sees prices averaging a $7.25 a bushel in the second quarter of this year, up from an average of $6.4775 since January 1. The price is now $7.065 a bushel and the record high is $7.65. Rabobank expects this record to be broken in the next few months.

Last week, the US Department of Agriculture (USDA) published its latest World Agricultural Supply and Demand Estimates (WASDE).

At the end of this year's season, the US is only expected to have 675m bushels in its stockpiles – is just 5pc of what the country uses in a year. This is the lowest annual surplus since the 1995/96 growing season.

"We expect to see further upside for a number of markets in the months ahead with risks of a return to widespread government intervention through stockpiling or trade bans," Mr Chandler said. "We see corn as the upside leader in the agri-commodity complex.

"For US corn, there are three main drivers of demand," says Connor Noonan, commodity analyst at asset management house Castlestone. "These are ethanol, feed use and export."

He thinks controlling prices will require some sort of demand rationing.

"Because of the extension of the ethanol bill, this is largely a government mandated demand. The US also has the smallest herd of cattle since 1963, so feed demand is already relatively low, so the only way to make a sizeable impact is by reducing exports."

"December futures are about 85c lower than the near-term futures, so the market is pricing the new crop at a discount to what is currently available." Mr Noonan adds. "However, we have had wild weather this year that has helped to push up prices, so a fall is dependent on the weather."

Rabobank is most bullish on corn just because of poor harvests, but also record ethanol use as a fuel, which is given subsidies by the US government. Rabobank calculated that discretionary blending of ethanol with fuel remains profitable as long as corn prices are below $7.50 a bushel. However, the US government doesn't look like it will cut these subsidies anytime soon.

"Ethanol blender incentives remain in place and export demand prospects remain strong with sugar-based ethanol uncompetitive at current sugar prices," the WASDE said.

But once again the issue of whether food should be burnt as fuel is coming to the fore.

On Friday, the Washington Post published an article accusing the biofuels industry of contributing to rising food prices and "doubling the challenge of producing more food."

The article said that, since 2004, for every additional tonne of grain needed to feed a growing world population, rising government requirements for ethanol from grain had demanded a matching tonne.

The US biofuels industry acted quickly to refute the suggestions. Growth Energy, a coalition of US ethanol producers, issued a statement On Friday denying ethanol was the problem.

"Every ethanol plant in the country turns out animal feed as well as fuel – we only take the starch out of the corn kernel but put all the protein, fibre and oils right back into the food supply as 'dried distillers grains.' Even then, ethanol's use of the global grain supply is a fraction."

If corn prices do hit the record levels predicted by Rabobank, the ethanol debate will return with a vengeance. Most commentators thought that the biofuels debate had been settled during the food spike in 2008, but it appears that it has not.

The issue is the same as it was three years ago - can the world afford to burn food as a fuel? If prices continue to rise, the answer is likely to be a resounding no.

(Source: http://www.telegraph.co.uk/finance/markets/8321370/Corn-prices-will-continue-to-rise.html)