In the fall of 2006, corn was hovering around $3 per bushel and farmer’s cash flows were tight. Up until that point, corn had been thought of as a commodity used primarily for feeding livestock. Suddenly, a shift in government policy encouraged the use of ethanol as a “home-grown, cleaner burning” alternative to petroleum. Corn was the natural input used to make ethanol as it was plentiful and easy to convert. Shortly thereafter, corn prices rose to $6 per bushel and the feed versus fuel debate began.
Even though corn prices have dropped back into the $3 range, the discussion of the merits of corn-based ethanol continues. Only now, the question is whether corn should be viewed in the context of agricultural policy or energy policy (or both!). The University of Illinois recently published an article (Will Corn Prices Follow Energy Policies Or Commodity Policies) that addresses this issue. In a nutshell, farmers and traders will need to determine if corn prices are more likely to follow the direction of the oil market, or the oil seeds (commodity) market. The ability to understand the affect that both markets will have on corn demand, may be the difference in locking in a profit or a loss in the future.
Let’s be honest – in less than 4 years, corn-based ethanol has created both incredible prosperity (for grain farmers) and unmitigated disaster (for livestock farmers and ethanol producers) at the same time. It has driven farmland prices and cash rents to record levels that may or may not be sustainable in the future. I believe that corn-based ethanol will continue to be a key component of our country’s energy policy well into the future. How it is ultimately viewed (and manipulated?) by policy makers, is yet to be determined.
