Ethanol demand pushes corn up

Price hits nearly $4, CBOT limits trading

January 13, 2007|By Robert Manor | Robert Manor,Chicago Tribune

CHICAGO -- Corn continued its sharp rise in price yesterday, driven upward by demand for ethanol and an increasingly prosperous world eager for food.

The benchmark price of corn reached an exchange-imposed limit of $3.965 a bushel shortly after trading began at the Chicago Board of Trade.

To maintain financial stability, the board limits daily increases and decreases in corn to 20 cents per bushel. Limits are rarely needed, the exchange said, and come into play only when prices are highly volatile.

For most of the past decade, farmers have received an average of $2.40 a bushel for their corn, and yesterday's price was among the highest of the past two decades.

The flash point came in the morning after the Agriculture Department released reports showing that corn exports and domestic demand are strong at a time when less corn than expected will be in storage at the start of autumn.

That means higher prices for farmers in Illinois, Iowa and Indiana, one of the world's great corn-producing regions.

But industry analysts say other factors are propelling the price of corn higher.

Demand for corn as a gasoline substitute is growing rapidly as is demand from Asian countries increasingly hungry for meat from corn-fed livestock.

"This is ethanol-based," said Tim Hannagan, head grain analyst for Alaron Trading Co. of Chicago. "Ethanol is not going away."

Mainly motivated by the desire to raise farm incomes, the states and federal government have encouraged businesses and farm cooperatives to build ethanol distilleries. In the United States, the raw material for ethanol is corn.

Ethanol, better known as alcohol and identical to that found in liquor, beer and wine, is added to gasoline as a substitute for high-priced petroleum.

Production is subsidized by the government and imports are deterred by a 54-cent-a-gallon tariff aimed mainly at Brazil, which produces ethanol more cheaply than the U.S.

"There are 109 operational ethanol plants [in the U.S.]," Hannagan said. "We expect [another] 53 to open this year."

A.G. Edwards sees high corn prices as the coming norm, not the exception.

"We believe the move above $3 per bushel is a structural shift driven by ethanol-related demand growth," wrote analysts for the investment house. "We expect corn prices to remain strong."

China, too, is producing an increasing amount of ethanol from corn as it, like the U.S., seeks to limit its dependence on imported petroleum. Analysts said that also supports the global price of corn.

For generations, corn was grown mainly to feed livestock and to make other products such as corn oil and sweeteners. That remains the primary market for U.S. farmers, who export a substantial portion of their crop.

But the high price of corn seems to be having no effect on U.S. exports, at least not yet.

"Mexico and Japan have been huge buyers of corn," said Vince Ambrose, a trader-broker for Man Financial Fox Investments in Chicago, one of the largest commodity trading companies in the world. Taiwan and South Korea, which once bought large quantities of corn from China, have increased their U.S. purchases, he said.

"Higher prices at some point will cut demand," Ambrose said. He predicted that the price of corn will stall at about $4.50 to $5 a bushel as potential buyers turn to alternative grains or do without.

The increasing demand for corn is evident at the Chicago Board of Trade, where vast sums change hands daily on the future prices of commodities.

Limits on trading, like that imposed on corn yesterday, are unusual.

"This doesn't happen very often," said David Lehman, managing director of business development at the board of trade. "Sometimes we go two or three years without hitting a limit."

The limits are intended to allow financial markets to digest major news, Lehman said.

"It's a cooling-off mechanism," he said. "It's a financial safeguard."

Robert Manor writes for the Chicago Tribune.

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