Corn is the most widely produced feed grain in the United States, accounting for more than 90 percent of total production. At least 80 million acres of land are planted with corn. The majority of the crop is used as livestock feed; the remainder is processed into a multitude of food and industrial products including starch, sweeteners such as unhealthy high fructose corn syrup, corn oil, and high-in-demand ethanol for use as a fuel. As corn prices rise, agricultural companies stand to benefit as their corn or corn seeds command a higher price in the market. Companies who buy corn or derivative products such as high fructose corn syrup can be hit with much larger costs when corn prices rise.
Corn prices – which usually means the price of corn futures – are intimately tied to energy prices, because corn is used to make ethanol, an additive in gasoline. Corn prices peaked in June 2008 with the Iowa floods – at around $7.88 / bushel, then fell in late 2008 and early 2009 as commodity prices – and in particular oil prices – declined, a result of a slowing economy brought on by the 2008 Financial Crisis.
Demand For Corn-Based Ethanol
Analysis from the International Food Policy Research estimates that rising demand for ethanol caused 40% of the rise in corn prices from to 2007, and analysis from the CBO estimates that rising demand for ethanol caused 35% of the rise in corn prices in 2008. This is because rising demand for ethanol directly translates into rising demand for corn, at least until alternative biofuels become more price competitive. Demand for ethanol is directly related to the ratio between oil and corn prices – how much ethanol can be sold for (essentially the price of oil) divided by the cost to acquire corn (corn prices). If this ratio is higher than 90%, manufacturers will earn enough money to cover the cost of building an ethanol plant and to use it. However, governments across the world have implemented subsidies that make it profitable to produce ethanol even when that ratio is below 90%.
Government Regulation On Corn-Based Ethanol
Ethanol is an example of a biofuel — a fuel produced from agricultural products rather than extracted from the ground like oil. Because Ethanol is “grown” as corn rather than pumped out of the ground, it is considered a form of renewable energy. Because ethanol can help conserve gasoline and reduce air pollution, several states, including California and New York, require that gasoline contain 10% ethanol. Legislation is pending in a number of other states. If the number of states requiring ethanol as an additive increases, or if the amount of ethanol that gasoline must contain increases, ethanol demand and therefore corn prices will increase. Government regulation in the U.S. has further buoyed corn prices. A tariff on imports of Brazilian ethanol, which is made from sugarcane, has increased demand for domestic, corn-based ethanol.
Alternative Biofuels Other Than Corn?
Corn based ethanol is the most widely used biofuel because it is the cheapest. There are many contenders wishing to take corn’s place, including alternative feedstock like sugar cane and grass, as well as trees and sugar beet. Close to one billion dollars of Obama’s stimulus bills spent on advanced biofuels research will make these alternatives more viable, but will also likely increase demand for ethanol as a whole.
- Cellulosic ethanol uses enzymes and other processes to produce ethanol from waste plant matter, including grass and wood. One benefit of cellulosic ethanol is that it would allow refineries to produce ethanol with cheaper waste plant matter without diverting corn from the food supply.
- Algae ethanol uses many of the same processes used to turn cellulose into ethanol. However, it is potentially more scalable. An acre of algae can be used to produce 35x the ethanol as an alternative like soybean.
The Value of The U.S. Dollar (USD) Determines Demand for Exports
The value of the dollar effects the price competitiveness of U.S. exports of corn. The depreciation of the dollar from 2006 to 2007 cause exports to rise 14%, which cause domestic corn prices to increase.
Demand For Animal Feed
Approximately half of corn produced in the U.S. is used for animal feed. As living standards in developing countries increase, demand for meat increases, which increases demand for animal feed, which is made in part of corn.
Of course, the weather, in large part, determines the supply of corn. Particularly wet or dry seasons limit production, which in turn causes corn prices to increase. Conversely, when the weather is nice and crop yields are abundant, the price of corn decreases. Those that get a precise and accurate medium to long-term forecast have a real ‘edge’ in knowing which way corn will likely go.
Which Companies Benefit From Higher Corn Prices?
- Archer Daniels Midland and Bunge (BG) grow corn and as such benefit from rising corn prices as their crops command higher prices on the market.
Monsanto and DuPont produce corn seed which is genetically engineered to have properties that make it ideal for ethanol production. They stand to benefit from rising corn prices because farmers will tend to increase the amount of corn which they plant and therefore the amount of cornseed which they buy.
- UAP Holding (UAPH) distributes fertilizer, insectiside, anti fungal, and other chemicals used in farming of corn. To the extent higher corn prices lead to a boom, especially if a new chemical comes to market which boosts yield, UAPH could benefit. But do know that the main hurdle will be canibalization, if farmers cease producing a crop that requires greater use of chemicals and start producing corn which requires relatively few and low levels of chemicals.
- Potash Corporation of Saskatchewan (POT) and Mosaic Company (MOS) produce fertilizer and benefit from high corn prices as farmers use more crop nutrients to try to increase yield.
- Deere & Company (DE), as the world’s largest tractor manufacturer, benefits from biofuels regardless of which crop (corn, soybeans, other grains) is ultimately used for fuel.
Which Companies Suffer From Higher Corn Prices?
- Coca Cola, Pepsi and other makers of non-alcoholic beverages are hit particularly hard by rising corn prices, as high-fructose corn syrup is the principal sweetener in many of the soft drinks these companies produce. These companies’ bottlers, such as Coca Cola Enterprises and the Pepsi Bottling Group are also impacted.
- Heinz and other ketchup makers suffer when corn prices go up because high fructose corn syrup is key ingredient in ketchup. Corn syrup prices have shot up 25% for Heinz, effectively raising their ingredients cost by nearly 5% in quarter ending Aug 1, 2007. Only 2.8% of that increase was passed on to consumers via a price raise.
- Tyson Foods, Pilgrim’s Pride (PPC), Smithfield Foods (SFD) and other livestock companies use corn as animal feed. When corn prices go up, it becomes more expensive for them to raise animals, squeezing their profits.
- Kellog, General Mills and other cereal companies can be hurt by rising corn prices, however, wheat is a far more common ingredient in cereals and changes in wheat prices are more likely to impact these companies than changes in corn prices.
- Kraft foods and other snack food companies whose snacks are made from corn or high fructose corn syrup can be hurt by rising corn prices.
- UAP Holding (UAPH) distributes fertilizer, insecticide, anti fungal, and other chemicals used in farming. The main hurdle will be canabalization, if farmers cease producing a crop that requires greater use of chemicals and instead start producing corn which requires relatively few and low levels of chemicals. This was discussed on the 3rd quarter 2007 conference call.
- Hormel Foods (HRL), Tyson Foods (TSN), and Sanderson Farms (SAFM) are hurt as corn prices rise. Corn can be a significant input in the production of meat products as it is used for the feed of hogs, chicken, cows, etc.