TMFDeej (99.47)

Why the price of corn is headed higher

March 02, 2011 – Comments (2) | RELATED TICKERS: KRFT , MOS , SYT

With the price of corn sitting at well over $7.20/bushel, more than twice the level it was at a year ago one has to wonder how much further prices will rise.  I can't claim to know how much, but I can say with a high degree of certainty that corn prices are indeed headed higher in the near-term.

Refined gasoline FOB New York (RBOB) is currently trading at $3.00 per gallon - wholesale before state & federal taxes.

Ethanol futures closed yesterday at $2.60 a gallon.

This makes ethanol currently 40 cents a gallon cheaper than gasoline.

Add in the 45 cent blenders tax credit and there is currently an 85 cent per gallon incentive for gasoline blenders to blend ethanol with gasoline.

The larger the financial incentive to use ethanol, the greater the use of ethanol. The greater the use of ethanol the larger the production of ethanol. The greater the production of ethanol the more corn jused to produce ethanol. We are likely to see corn prices trade even higher over the next several weeks.

Reuters reports 6 cargoes of U.S. ethanol are being loaded at the Gulf of Mexico for shipment to Brazil. We are also likely to see an increase in the shipment of ethanol blends to Europe. An exporter can blend 80% ethanol with 20% gasoline, claim the 45 cent per gallon blenders credit from the U.S. government and export the product to Europe.

High crude oil prices equals higher corn prices.  Add to this the fact that the supply of corn is currently at its lowest level since 1963 and the fact that the Chinese are now importing corn and the seed have been sown for higher prices.

So what does this mean?  For one, we're all going to see higher food prices at the grocery store this summer.  These higher food prices mean that the input costs for food processors like Kraft (KFT) and restaurants will rise placing pressure on their margins.  On the flip side, it likely means that fertilizer and seed companies, and just about anything that helps farmers reap higher crop yields will rise unless general market weakness causes multiple compression.

Deej