Tuesday, February 15, 2011

Corn-itive Dissonance

There is something puzzling about the state of corn reserves in the United States.  Corn prices keep going up, and corn reserves are reported to be at fifteen year lows.  Blame is being placed on demand from the ethanol industry, which manufactures ethanol from corn to be blended with gasoline for motor fuel.   Story here at NY Times. Corn for food is in competition with corn for fuel on American cropland.  The possibility exists that we will experience shortages of corn for food and that what corn does exist for food will command high prices.

On the other hand, the U.S. has a gasoline supply glut the like of which has not been seen in 17 years, according to this story.  If there is a glut of gasoline, theoretically market factors would dictate less production of gasoline until the glut subsides.  If there is less production of gasoline, theoretically market factors would dictate less production of ethanol to blend into gasoline.  Less production of ethanol would ease the demand for corn.

Questions:  If the U.S. is in the midst of a gasoline supply glut, should there not be a reduced demand for ethanol to blend into the gasoline, and therefore a reduced demand for corn to be used to make ethanol?  If so, should there be more corn being produced for food and less for ethanol production?  If so, where is the corn?

I don't profess to entirely understand how commodities markets function, but something does not seem right.  It makes me think that some other factor is at play, and that the ethanol industry is being blamed for high corn prices and a possible shortage.  What the other factor is, I don't have a clue.  It does warrant a wary eye, both as to preps and to stay ahead of what may be an engineered crisis.

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