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- Corn Futures & Volatility In the musical "Oklahoma," Curly enters the stage singing the classic song "Oh What a Beautiful Morning." What accounts for his expansive mood? The corn is as high as an elephant's eye, which on nearly every farm from Oklahoma City to Beijing is considered a mighty good thing. Global corn production is big business. According to the United States Department of Agriculture (USDA), in 2007/2008 global corn production reached 791 million metric tons (MMT). World production leader was the U.S. with 331 MMT, followed by China with 152 MMT, Brazil with 58 MMT, and Mexico with 23 MMT. Why so much corn? There are currently more than 3,500 uses for corn and the number is growing. The USDA breaks corn usage into three major categories:
Nearly half of U.S. corn is grown as livestock feed. Of the roughly one-third devoted to other domestic uses, the breakdown is this:*
*Nebraska Corn Board
Corn Price Volatility Corn futures take the form of dollar-denominated physical-delivery 5,000-bushel (approx. 127 metric tons) contracts. Corn is traded electronically on CME Globex during the Asian & European daytime market hours, as well as during the primary grain trading hours. Corn is a commodity that is subject to price volatility from many factors, including: -Global demand for corn-based ethanol. Several U.S. states, including California and New York, now require that gasoline contain 10% ethanol. Analysts believe that from 2000 to 2008, rising demand for ethanol triggered up to 40% of the rise in corn prices. Demand for ethanol is directly tied to the relationship between the price of gasoline and the cost to acquire corn. -Development of alternative biofuels. Because of its relatively low price, corn-based ethanol is the most widely used biofuel in the United States. Alternatives include other feedstocks such as sugar cane and grass, trees, and sugar beet. Cellulosic ethanol uses enzymes and other processes to produce ethanol from waste plant matter, including grass and wood. Algae ethanol is potentially more scalable, as an acre of algae can be used to produce 35 times the ethanol as an alternative like soybean. -Strength of the U.S. dollar. The depreciation of the dollar from 2006 to 2007 caused exports to rise 14%, and domestic corn prices to increase. -Demand for animal feed. Approximately half of corn produced in the U.S. is used for animal feed. As demand for meat increases in developing countries, corn prices rise. -Weather. Production decreases during particularly wet or dry seasons, driving prices up. When the weather is moderate and crop yields are abundant, corn prices fall. In the U.S. Corn Belt, April of 2009 was the wettest April in decades, pushing back planting by several weeks, cutting yields and driving up prices. The weather has since moderated, and the USDA reported that by the beginning of August about 76 percent of the U.S. crops were silking, up from 55 percent a week earlier. Prices fell in anticipation of rising harvests in December. Silking is the first reproductive stage in corn development and a time when farmers can predict the grain yield. -Economic growth creates price pressure, especially in rapidly developing economies like China and India.
Corn futures provide a way for investors to effectively manage the price volatility inherent in the global corn market. To identify short and long-term cyclical price and volatility patterns for corn takes a deep knowledge of many disciplines including agriculture, the weather, and politics. For information on powerful risk-management tools that allow you to track and measure the risk of corn futures and options, contact PortfolioScience today. |
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