Corn has been an important food to the human race down the history. The first contact with corn is dated back to around 2,500 BC. However, corn has grown to be more than just another source of food over the past several decades. It has also become an important fuel source. Statistics have it that about 40% of the crop is used for corn ethanol – an alcohol that has become an important component of gasoline in the US. Apart from becoming a component of gasoline, it is also considered an alternative source of energy to gasoline. With corn (and some other agricultural commodities) being linked with gasoline, the factors that affect their prices are increasing. Below are the top factors.
With more and more ethanol coming from corn, the ethanol market is an important variable in pricing corn. Fundamentally, an increase in the demand for ethanol is going to increase the demand for corn. This would usually bring about a surge in eth price of the commodity. However, while a reduced demand for ethanol can adversely affect the price of corn, its effect is not always as huge as the effect of rising demand. One of the reasons for that is that, as stated above, only 40 percent of produced corn ends up becoming ethanol. However, rising demand would mean that the said 40% is about to increase.
Some analysts misunderstands this principle and, instead, say that ethanol demands doesn’t affect the price of corn very much, Whenever you come across such analysis, you should refer to the explanation above to understand what they are saying. And as with other commodities, just the demand outlook of ethanol is sufficient to cause short-term prices changes in the corn market.
Crude oil prices
Corn is fast growing into an energy commodity. This means that it would develop a price relationship with other energy commodities. This is the main reason why the direction of the oil market can be used to, partially, predict the direction of the corn market. And for the most part, the relationship is positive.
When oil prices go up, there are chances that the price or corn would go up as well. Since biofuels are being touted to replace oil in the energy industry, rising oil prices gives feeling that there will be a surge in the demand of biofuels – a class to which ethanol belong. The change in the demand dynamics of ethanol would in turn change the demand dynamic of corn. In 208, the UN released a report that support this point – that ethanol is creating a corn and oil price link.
To be fair, the correlation is not absolute. There are disparities at times. That is because the biofuel industry is still budding. However, the correlation might be huge in future as the biofuel industry becomes bigger. However, the size of the biofuel industry is big enough to being about short-term changes. So traders want to keep tabs on the oil market when looking to predict future corn prices.
This is one of the factors borne out of the growing importance of corn in the energy sector. According to a report from Growmark, a regional farm cooperative, this has grown to be the biggest driver of corn prices. The analysts, Kel Kelly and Scott Hornblower, sited instances when the effect of this factor overruled the demand from the biofuel industry. According to them, “Ethanol demand for corn increased 24 percent between 2008 and 2009, while corn prices fell 20 percent (from the intra-year high to intra-year low, corn prices plummeted by a whopping 60 percent!).”
The explanation for that is simple and straightforward. The energy sector is responsible. Followers of the energy sector probably already know that anything energy attracts a lot of interest from the investment community. This is just what is happening with corn. So it would be smart for traders to look at how the investment community values corn.
This factor has about the biggest effect on the price of corn. Another thing is that the effect of climate on the corn market does last from the near term to the long-term. For instance, Nature Climate Change published a report in 2012 that suggests that, unless farmers develop more heat-tolerant corn varieties or gradually move corn production from the United States into Canada, recurrent heat waves would cause sharp price spikes over the next few decades.
On every occasion, when you are predicting the direction of the corn market, it is always important to factor climate outlook into your analysis. As a matter of fact, it is a fundamental element in the pricing of any agricultural commodity.
Being the second largest economy in the world, and the most important emerging market, demand outlook from China can also affect the short-term prices of corn. Here are a number of reasons for that. First, since 2010, China is the biggest consumer and producer of energy in the world. And it is poised to grow even bigger. The country’s effort to get cleaner energy means that the demand for biofuels like ethanol would rise. So it is important to keep tabs on the Chinese power sector to have a view on what the demand.
Since the production of corn is not evenly distributed around the world, geopolitical issues could bear significant weight on the short-term prices of corn. And, in reality, the top producers of corn are prone to geopolitical crises. For instance, during the early part of 2014, the price of corn was on an upward trend. The crisis in Ukraine was a contributing factor to that trend. It would be difficult to say that the Ukrainian crisis played no part when you consider that Ukraine is the fifth largest producer of corn in the world.
What’s more, the state of the global economy also affects the price of corn. Historically, corn tends to flourish in boom economies, and it tends to fall in weak economies. At its heart, this relationship is because a change in the economy does affect industries that make use of corn.