Comments by gary399
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Page 1 of 1
January 9, 2009
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Posted on April 6 at 4:51 a.m.
The actual number of acres planted in corn in the U. S. has decreased from approximately 100 million acres in the early 1940’s to 78 million acres in 2006 because the demand for corn at a price where farmers could earn enough profit to plant more corn has not been present. Corn farmers have increased productivity to a level where growing corn has been unprofitable for the most inefficient farmers, and the acreage planted in corn has declined.
Using corn for ethanol production has introduced a new use for corn, and as a result, there has been much publicity about the possible impact of this new demand corn production and the price of corn. In early 2007, corn futures rose to well over $4.00 per bushel. This futures market price increase has lead to speculation that the growing number of ethanol plants will drive the price of corn so high that the profit margins for ethanol plants will be reduced or disappear. Speculation and discussion about corn prices being driven higher by demand for ethanol can be best addressed by reviewing these speculations in the light of basic economic analysis of price, supply, and demand.
The answer to the question of possible higher demand leading to higher corn prices can be best understood using the following economic framework.
1. Increased demand for ethanol leads to higher demand for corn which leads to higher corn prices.
2. Higher corn prices lead to increased production of corn which exceeds demand at the high price, resulting in significant surpluses and as a result, corn prices fall back to their long term average This pattern has repeated itself consistently for the last 50 years, regardless of the reason for the increase in demand or the increase in price. It is economic law in any relatively free market that high prices for any renewable commodity will create a surplus of that commodity, baring any unusual weather patterns.
As mentioned above, this pattern of price, supply and demand applied to corn has repeated itself consistently regardless of the cause of the fluctuation in corn price.
Gary Schwendiman, Ph.D.
Chairman, Ethanol Capital Management
www.ethanolinvestments.com
On The problem with ethanol