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Is Corn Still King?

Is Corn Still King?

17 June 2013

ANALYSIS - Much has changed in the world of commodities since late 2005, writes Darin Newsom, contributing writer to TraderPlanet.

Trader PlanetIf someone were to have awakened from a Rip Van Winkle-like slumber during the summer of 2012 to find corn trading near $8.50, he would surely have wondered just how long he had been asleep. Unlike the story of old, the radical change in the market didn’t take 20 years, but a scant six. Now, just as the Rip got in trouble for speaking well of King George III in the time of George Washington, we are left to wonder if corn is still king of commodities?

I know, crude oil and gold traders will scowl at the idea of having been replaced by some huckleberry Midwestern market, but it can be successfully argued that the change in the dynamics of the corn market back in 2005 and 2006 paved the way for increased interest in the commodity sector as a whole. And that it has been corn’s prolonged demand market that has not only sustained that interest, but insulated the Midwest economy (for the most part) from the problems of the financial downturn that began in 2008.

"A demand market is an interesting creature that
like the Loch Ness Monster doesn’t make that many appearances."

Key Events

Before we delve into the future, let’s travel back in time to review the events that led to corn receiving its crown in the first place. The passage of the Energy Policy Act of 2006 established that Renewable Fuels Standard.

This in essence kick-started what had been a slow growing U.S. ethanol production industry, so much so that in 2006 the estimated use of corn for ethanol climbed above 2.0 billion bushels (bb) for the first time. In 2007, that demand jumped to more than 3.0 bb, then 3.7 bb in 2008, and 4.5 bb in 2009.

By 2010 demand had made its way over the 5.0 bb mark where it held near steady for 2011 and through initial estimates for 2012 (May 2012 USDA Supply and Demand report).

Demand Picture

A demand market is an interesting creature that like the Loch Ness Monster doesn’t make that many appearances. Most of the time prices changes in commodities, particularly grains, come from changes in supply due to weather, resulting in short-term appropriately named supply driven markets or weather markets. But a demand market is something different. By definition it exists when there is increased demand pulling on stable to growing supplies (remember that last phrase), leading to long-term changes in price.

US Corn Demand

Further Reading

You can view the full Trader Planet article by clicking here.


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