The US ethanol industry's aggressive lobbying via RFA, Growth Energy and NCGA and USDA endorsement of the policy add to concerns over China's low corn stocks, climatic uncertainties and rising instability in the Middle East, which raises the cost of oil. In fact there are many factors at work that conspire to inject more volatility into soft commodities, but it seems logical to assume that the ethanol mandates are to blame for a good share of recent price increases. In the US, corn demand for ethanol production has risen very quickly to an unreasonable 37% of US production (USDA data, latest Feb 2011 report) and shows no sign of slowing down. A reasonable expectation is a continuation of the subsidy system (albeit under a modified regime) which will further reduce stocks and possibly start to hit US corn exports. It is increasingly difficult to be optimisic for feed users and more generally, for food prices as long as "food or fuel" continues to distort soft commodity markets. In some people's view, "speculators" are simply reading the US industry signals on corn demand and betting accordingly. Meat, poultry and dairy producers and processors are paying the price of the policy and the consumer will continue to suffer from accelerating price increases.
Author: M Benedict
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