Corn/Crude Oil/Ethanol Price Relationships
Chart shows revenue (bars) and profit (line) for ethanolDuh! So what does that mean?
Grain traders (and commodity traders in general) are trying to find relationships between how ethanol, crude oil and corn trade. Much like how soybean and canola price (or corn and barley use to) trade in relation to each other. Stay with me here. Some key points related to the quote are:
- We are talking all USA now. Canada gov. has no incentives and the corn market is US based
- The "mandate" is government support for ethanol. The support is gov. incentives that ensures profit ( this happens now) and if oil industry is forced to mix a certain %% (5 to 15% ?) of ethanol into fuel.
- My understanding is support for ethanol is about $0.50 per gal. Plus tarriffs to keep cheap ethanol out of the market. (brazillian ethanol made from sugar cane)
- Free market ethanol/crude relationship should be parallel. One goes up/down the other does to, with some type of "spread" between them. The "spread" or difference between the two will give you a idea where the price of one or the other will be ( or should be).
- In a free market crude will set that price, ethanol will follow
- If the "mandate" mantains profit and ensures demand the price of ethanol will stay strong as will corn price. Crude price will follow demand but demand will be reduced by the amount of ethanol used. Reduced demand equel reduced price. This will not be a free market situation
- Corn prices are leading this grain price renewal. Grain producers need corn prices to stay strong to keep all prices up.
The bottom line is: Without US subsities to ensure profit and guidelines to ensure demand for ethanol mixes into fuel the price of corn and all (most) grain/oilseeds would drop.http://www.dtnethanolcenter.com/index.cfm?show=10&mid=38
Enjoy the post
posted by Garth Johnston @ 7:23 AM
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