Saturday, March 29, 2008

Interconnected Agriculture

The rise of the United States ethanol industry has had at least one significant impact -- for better or worse, ethanol has tied agriculture prices to the energy market. Now a large increase in speculation for oil leads to increased demand for a relatively cheaper fuel (ethanol), which in turn puts positive pressure on corn prices so as to ensure that enough acres are planted to satiate the demand.
Analysts in both industries will be watching closely Monday as the USDA (United States Department of Agriculture) releases its predictions on summer acreages for corn and soybeans. The estimates are not binding and are based on surveys of farmers, coops, and seed distributors across the country. While many are speculating that USDA estimates will show a decrease in corn acres from the amazing amount of corn planted last year, the futures markets are already making a bold statement. This past week while corn prices dipped to around $4.80 per bushel and allowed ethanol margins to grow slightly, the futures prices for corn climbed to over $5.60 per bushel on the CBOT (Chicago Board of Trade). This indicates that commodity traders are almost positive that the USDA estimates will show a significant decrease in corn production this summer. Even though that will in turn put pressure on ethanol prices to increase, it may not be as bad a thing for corn acres to dip this summer as some might think. Last year saw more than 92.9 million acres of corn planted (which is the most since 1944). Analysts believe that the USDA will predict around 86 or 87 million acres of corn this year -- still a lot but off from last year. This is due to a very strong market for soybeans (nearly $15 per bushel), a need felt among many farmers to practice crop rotation techniques, and a very large increase in fertilizer prices that make growing corn more expensive than soybeans because of their greater need for fertilizer.
My point is that if some of the acres go back into soybeans, it will recharge the land and possibly bring down some of the nitrogen and phosphorous price increases we've seen over the last year. This in turn could allow for a gradual lowing of corn prices to manageable levels while still allowing profit margins to remain constant for farmers. With more and more cellulosic ethanol technology set to come online in the next two years, it would seem prudent to start moving away from a charged up and often speculation-dominated market and prepare for another rearrangement within these markets as ethanol production switches from predominantly corn to a mix of corn and other plant materials.

1 comment:

mus302 said...

I think a lot more people are waiting for the crop projections to come out this year than probably have in many years past. It will be interesting to see how acreage shifts this year.