Rising U.S. corn prices in the face of a Midwest drought have forced Valero Energy (VLO) to shut...

Rising U.S. corn prices in the face of a Midwest drought have forced Valero Energy (VLO) to shut two of its 10 ethanol plants, each with the capacity to produce 120M gallons of ethanol per year. Rabobank analysts predict corn prices could rise another 25% by year's end on lower yields due to the weather, pushing prices near the all-time high of $7.99/bushel.

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  • Mark Bruns
    , contributor
    Comments (37) | Send Message
    It USED TO BE that prices for grains were more inelastic than they are nowadays -- a large proportion of corn was consumed for food or livestock breeding populations that needed to be maintained -- but grains are still relatively price inelastic ... after a certain point, a decreases in supply leaded to certain amount of panic buying. The fund ownership in grains is not especially large yet -- it would be safe to say that investment funds are monitoring the situation closely and will jump in quickly if a price spike looks likely, i.e. the PUBLIC tends to be "notified" with news headlines of huge profits to be made in commodities after that spike has happened. Right now, WEATHER still drives this market ... if plentiful rains started falling right now across the corn belt the market would, in all likelihood, drop like a rock.


    Nowadays, at certain price points [depending upon demand for gasoline], we see demand drop out ... that's what we are starting to see with the idling of some ethanol plants -- it's not a permanent for those plants, of course, but as corn gets harder to find in sufficient quantities to keep the plant running [and spot prices rise], it makes sense for plants to go offline for longer periods to do maintenance tasks for awhile and wait for lower prices [and new crop harvest].


    The predicted price increases are largely dependent on expected yields. Most of the fluctuation is weather-driven, but it would be reasonable to expect that USDA crop reports will err on the side of painting the rosiest scenario possible until AFTER harvest is complete in December. Incumbency does have it's advantages in things such as control of Cabinet Departments that report economically-sensitive data.
    28 Jun 2012, 07:23 PM Reply Like
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