In the United States, corn is used predominantly in animal feed, ethanol and artificial sweeteners. In the animal feed sector, soybeans, wheat and other grains like sorghum are comparable substitutes to corn, causing the prices of these crops to fluctuate partially in line with one another. Furthermore, Americans have been consuming less artificial sweetener due to health reasons, which has reduced the demand for corn used in sweetener production. In the past decade, demand for corn from ethanol producers has been growing – so much that it has caused historic rises in the price of corn.
The majority of ethanol is produced from corn in the United States, which led to a massive new demand market for corn producers as the fast-growing ethanol production sector thrives. The Energy Policy Act of 2005 has contributed to this demand growth, providing government support for biofuel additives in gasoline as a way to ease the burden of expensive petroleum imports. The 2005 bill also established the first biofuel production mandates, which were expanded under the Energy Independence and Security Act of 2007 in the form of Renewable Fuel Standards that would set production targets every year. As a result of increased demand from ethanol producers, corn supplies increased and genetically modified strains have been introduced and adopted. These strains are resistant to herbicides and pesticides, thus yielding a substantially larger crop. Even with the supply increase, though, the high demand for ethanol production caused the price of corn to more than double from 2005 (at $1.96 per bushel) to 2008 (at $4.70 per bushel).
Although complex government support traditionally kept the price of corn relatively stable, its tie to movements in the price of crude oil has made corn prices much more volatile. The price of crude oil collapsed in late 2008 due to the recession. The low price of oil at the time reduced the incentive for ethanol production, causing the price to dip to $3.75 per bushel over 2009. Recovering demand and rising oil prices over 2010 drove the price of corn slightly upward to $3.81 per bushel. However, in early 2011, the price of crude oil spiked. The price of corn was driven up over $6.00 per bushel due to the relationship explained earlier. The price settled back down over the remainder of the year, but remained higher than the previous two years, averaging $6.02 per bushel over 2011.
In 2012, the worst US drought since 1956 caused the price of corn to increase 10.9% to $6.67 per bushel. In fact, the average monthly price of corn hit a record of $7.63 per bushel in August 2012 after 10 million of the 97 million planted acres were destroyed. In 2013, prices declined 7.8% as a result of a record US corn harvest, which increased the supply of corn. This trend continued in 2014 with another record harvest for the year, further increasing supply and pushing prices down. Additionally, the Environmental Protection Agency (EPA) did not release a finalized Renewable Fuel Standard for 2014, effectively removing forced increase in demand for ethanol production. Biofuels have in part hit a demand ceiling as ethanol has already been blended to make up 10.0% of the US gasoline supply, the safest amount which most cars on the road can handle. Consequently, prices fell another 33.2% in 2014. Continued oversupply and limited demand from ethanol producers led to continued price declines through 2016. Overall, IBISWorld projects the price of corn to fall at an annualized rate of 13.1% to reach $3.30 per bushel in 2017.
Like most commodities, the price of corn is highly volatile and difficult to predict. This has especially been the case in recent years as the price has become increasingly tied to movements in the price of oil. Ongoing expected volatility in the price of crude oil will create volatility in the price of ethanol, in turn affecting demand for corn. However, several factors will likely help push down corn prices in the coming years.
The World Trade Organization has pushed hard for lowered subsidies. The 2014 Farm Bill eliminated direct payments to farmers and reduced other subsidies, which will likely lower corn prices in the coming years. Second, genetically modified corn will almost completely supplant unmodified corn during the next five years, further boosting yields. Higher yields mean greater supply and, therefore, lower prices. Third, companies are searching for other crops to use in biofuel production. Energy companies already make biodiesel from soybeans, and other countries around the world use sugarcane extensively in ethanol production, especially Brazil. Additionally, the EPA did not release a finalized increase in the Renewable Fuel Standard for 2014, setting a precedent that increasing year-on-year production is no longer guaranteed. As a result of these trends, the price of corn is forecast to remain low, increasing only 0.9% in the five years to 2022.
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