Is China playing us for fools?

Ethanol on the rise

Corn prices have been down around a third from last year, though they rallied Monday on expectations that the sharp cut in plantings will combat rising production. Chicago Board of Trade corn futures expiring in May settled 2% higher at $5.02 a bushel, a seven-month high.

The Journal goes on “But record-setting corn prices spurred production elsewhere. Federal data show farmers outside the U.S. will harvest 349 million acres of corn in the current crop year, up 35 million from five years ago—an expansion larger than the area of Greece.  For much of the past four decades, the U.S. has accounted for two-thirds or more of global corn exports. That fell to a record low of less than 20% last year as the 2012 drought made U.S. corn too expensive for many countries. Exports are now rebounding, but forecast to make up 36% in the current crop year, according to federal projections.

Growing global competition is emerging as rapid growth in corn demand at home ends. Starting in 2005, federal law required increasing amounts of ethanol to be blended into the U.S. gasoline supply, with ethanol production claiming more than 40% of corn consumption last year, up from less than 15% in the 2005-06 crop year. But the buildup of demand from ethanol makers has ended, and a reduction in fuel use because of more efficient cars and people driving less has federal officials looking at scaling back the requirement.

The rise in ethanol production came amid disappointing harvests and growing hunger for corn from China as that nation's economic growth fueled greater demand for meat. The result: Corn prices eclipsed $8.30 a bushel in 2012 at the height of the U.S. drought, compared with an average of $2.90 in the 2000s. One of the fastest responses to the record prices is coming from Ukraine, which is on track to become the world's third-largest corn exporter. This year, its shipments are expected to surge 45% to 18.5 million metric tons.

Fueling that growth is interest from China, which has emerged as a major buyer after avoiding corn imports for several years. The Asian nation wants suppliers beyond the U.S., with not just Ukraine but Argentina and Brazil competing to sell crops there. The U.S. recently has seen hundreds of thousands of metric tons rejected by China because they contained a genetically modified trait that is unapproved in that country. Growing competition is fueling volatility in prices for U.S. farmers. Political unrest in Ukraine, where Russia annexed Crimea, has rippled through global markets. Traders fear financing will dry up and costs to import fuel and fertilizers will rocket, bringing a sharp decline in spring planting in Ukraine.

Ethanol of course is one reason why gas prices have been rising. Of course we should see a break in April as the seasonal maintenance season ends.  

 

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About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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