Posted by: usset001 | April 8, 2011

Ethanol demand for corn is raised – again.

For the fifth time in the last 12 WASDE reports, USDA raised its projection for corn used in ethanol production during the 2011/2011 crop year. USDA’s first projection, released in May 2010, estimated corn used for ethanol at 4.6 billion bushels. That estimate was raised 100 million bushels in the June 2010 report, another 100 mb in the November report and another 100 mb in the January 2011 report. Add to these increases another 50 mb rise in the February and April reports and corn used in ethanol now stands at a tidy 5.0 billion bushels.

My calculator tells me that USDA has raised the estimate of corn used for ethanol by 9%, all during a time when corn prices have essentially doubled. So much for prices rationing demand.

In my futures class we are examining futures spreads. I’ve asked each students to explore a spread of interest to them. This could be an interdelivery spread (e.g., July/December corn), an intermarket spread (e.g., Chicago vs. Minneapolis September wheat), or an intercommodity spread (e.g.’ corn/soybeans, hogs/cattle, etc). One student asked if he could examine the crude oil/corn spread.

Is this a spread? An intercommodity spread is a spread between different commodities that share a fundamental relationship. Five years ago I would have argued that crude oil and corn were essentially unrelated commodities. Today, I think the ethanol market is large enough that crude oil is driving the price of corn.

I told him to go ahead and explore the spread.


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