Price of commodities down dramatically since June. Corn is down 52% but ethanol demand still strong!

[JohnWxy]

What happened?? I thought ethanol was driving up food prices?? (THE lead economist for the World Bank said ethanol was responsible for 3/4ths of the rise in world food prices. According to a campaign by the The Grocery Manufacturers Association's (GMA) and the American Petroleum Institute ethanol was driving up food prices. And many prespicacious posters to this forum have been screaming about ethanol driving up the cost of food. But demand for food and ethanol is still strong. Why are farm commodity prices are dropping? How can corn and food commodity prices in general be skidding while ethanol demand remains strong? Could all the illustrious experts mentioned above be ...dae I say it ...WRONG???? oh my? COULD IT BE?

Well, commodity prices are dropping and it's because commodities investment by index funds and speculators has plummeted. As some have said, the price rise in these commodities was largely driven by investors moveing from stocks to commodities and then speculators jumping in betting on continued price rises which their buying activity produced. Now that they are pulling out of commodities (because of the downturn in the world economy) their withdrawal from commodities is bringing commodity prices rapidly down. Corn is now about where it was at the beginning of 2007.

http://www.ethanolrfa.org/objects/documents/1945/will_the_plunge_in_grain_prices_mean_lower_food_prices_at_the_supermarket.pdf

SPECULATORS PULL OUT OF THE MARKET

From corn to copper to oil, experts believe speculative investors played a significant role in the rapid
escalation of commodity prices in the first half of 2008. According to the financial publication Barron’s,
index funds and commodity pools accounted for nearly 60% of bullish positions on all commodities by
the end of March.5 Barron’s also suggests that unprecedented speculation has clearly influenced futures
prices, stating, “The speculators' bullishness may be way overdone, in the process lifting prices far above
fair value.”

In mid-February, non-commercial investors (chiefly speculative index funds, hedge funds, and
commodity pools) held nearly 484,000 total long positions in corn futures on the Chicago Board of Trade
(long positions are contracts that are purchased and held in the hope of profiting from an increase in
price). This is the theoretical equivalent of 2.42 billion bushels of corn—enough to produce
approximately 6.7 billion gallons of ethanol and 19 million metric tons of livestock feed. Indeed, in
testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs in May,
hedge fund manager Michael Masters said, “Right now, Index Speculators have stockpiled enough corn
futures to potentially fuel the entire United States ethanol industry at full capacity for a year.”

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NOw if the critics from the lead economist at the World Bank to The Grocery Manufacturers Association's (GMA) to the American Petroleum Institute were right I guess we can expect to see some pretty significant drops in the prices of food. If corn is down 52% and corn was 3/4ths of the cause of the rise in the price of food we should be seeing some pretty significant declines in the price of food. I can't wait to see food prices start coming down.

Maybe I better not hold my breath.

[Warpy]

1. Money moved out of the stock market and into commodities

futures last spring. Now both are being dumped by hedge funds and that has started a near panic selloff.

There was nothing holding those high prices up but speculation.

[JohnWxy]

2. Yep, You got it.

[Tandalayo_Scheisskopf]

3. Ooo...Watch it now!

Last time I brought that up, I had a Peak Oil advocate climb up my ass on a 24' extension ladder. They are really touchy about that and the strong evidence that a lot of the Peak Oil panic was being fed by those self-same hedge funds, to their friends in the press and on the net.

[Warpy]

5. I have IBS

and they wouldn't like what they found up there.

Seriously, I've developed a hide like a rhino when it comes to the conspiracy theorists out there.

[Ah Xoc Kin]

4. ethanol companies

have gone bust
that's part of it

[JohnWxy]

6. ethanol production increased in 2008 by approximately 3 billion gallons or almost 50%!

Kinder Morgan Energy Partners ... said it had completed a test that successfully transported a 5,000 barrel batch of ethanol through a gasoline pipeline in Florida. The company reportedly expects to transport ethanol through the pipeline to customers next month.

As reported in by The Houston Chronicle, the company said it had completed a test that successfully transported a 5,000 barrel batch of ethanol through a gasoline pipeline in Florida. The company reportedly expects to transport ethanol through the pipeline to customers next month.

According to the Chronicle, the company spent 18 months on the test and spent $10 million upgrading the pipeline with special seals, gaskets and other parts. Kinder Morgan is doing more pipe transportation tests in a pipeline between Mississippi and South Carolina, and preparing others in Oregon, a state with a new biodiesel mandate.
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ethanol production increased in 2008 by approximately 3 billion gallons to 9.3 billion gallons compared to last year (that's nearly a 50% increase!!__JW). Even more critically, production is projected by Informa Economics to reach 11.9 billion gallons in 2009.
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The demand for commodities futures from Commodities Index funds and Hedge funds DWARFS the demand for corn by ethanol distilleries. Now this investment activity is being pulled out of commodities (and pretty much every investment objective) and this is the reason the commodities prices are dropping so rapidly.

testimaony before Congress of Michael Masters, a hedge fund manager himself re the enormous investment and speculation in commodities futures contracts and commodity index funds


"Let’s turn our attention to food prices, which have skyrocketed in the last six months.
When asked to explain this dramatic increase, economists’ replies typically focus on the
diversion of a significant portion of the U.S. corn crop to ethanol production.11 What
they overlook is the fact that Institutional Investors have purchased over 2 billion
bushels of corn futures in the last five years. Right now, Index Speculators have
stockpiled enough corn futures to potentially fuel the entire United States ethanol
industry at full capacity for a year.12 That’s equivalent to producing 5.3 billion gallons of ethanol, which would make America the world’s largest ethanol producer."

~~
~~

" You can see from Chart Two that prices have increased the most dramatically in the first
quarter of 2008. We calculate that Index Speculators flooded the markets with $55
billion in just the first 52 trading days of this year.19 That’s an increase in the dollar
value of outstanding futures contracts of more than $1 billion per trading day. Doesn’t it
seem likely that an increase in demand of this magnitude in the commodities futures
markets could go a long way in explaining the extraordinary commodities price
increases in the beginning of 2008?"
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NOrmal market operations would not produce such dramatic movements in prices. This is a sure tip-off of excessive speculation and large amounts of money going into commodities futures (now also driven by commodities index funds). The prices for soybeans, wheat and corn have come down about 50% since July. Normal market conditions do not produce that much price movement that fast.

It has been reported that the demand for corn to make ethanol has driven up the prices of food (all food) all over the world. Well, the demand for corn for ethanol hasn't dissappeared since July but the prices for corn and other grains has dropped 50% in that time period. What gives???? Maybe ethanol wasn't such a big factor after all. (or just perhaps it's because ethanol while creating additional demand for corn also is bringing down the cost of petroleum which affects 38% to 47% of the cost of farm commodities - which makes it a 'wash' or maybe ethanol is bringing down the cost of food commodities a bit.) Sorry Don MItchell (economist at the World Bank who said ethanol was responsible for 3/4ths of the rise in food prices - world-wide!.