Are ethanol plants changing the rules on corn?

by Mike Verdin

Is ethanol's increasing take of US corn changing the rules on the grain?

Investors were certainly taken off guard on Tuesday by the firm demand that US officials are predicting for domestic corn. That strength is the reason that America's corn supplies are seen closing both the current season and 2011-12 below a snug 900m bushels.

They had expected some pick-up in consumption, after the sliding prices of the grain last month made it more affordable. Futures were dented first by liquidation, and then unexpectedly strong planting performance by US farmers.

But the extent of the rise in demand may be down to ethanol's influence.

Ethanol plants vs feedlots

And that is, after all, increasing.

Biofuels groups now consume more corn than livestock farmers, US Department of Agriculture officials said on Tuesday, bringing forward to 2010-11 the season when they see more of the grain going into ethanol than animal feed.

That could overlay fresh behaviours onto corn prices, of which a link with energy markets - and other ethanol sources such as sugar for that matter - is only the most obvious one.

They can, to some extent, switch to alternative feedstocks. Ethanol plants have proven able to take in some quantities of soft red winter wheat, as shown this week by rail-to-silos group The Andersons.

Crucially, ethanol producers may be more able to slow, or even stop, output in response to unprofitable conditions. Indeed, they factor maintenance downtime in operational schedules.

That's not so easy for feedlots relying on feeder-to-fed cattle cycles lasting half a year or so.

Volatility factor?

It may be well be that ethanol producers turn the taps on and off more quickly in response to varying corn prices than livestock feeders.

That would make corn demand more responsive to price, and help explain the kind of data changes unveiled on Tuesday.

That might also, in theory, reduce volatility in corn prices. Which would be some public relations consolation for an industry whose rise to greater prominence than the livestock industry in corn consumption may provoke a fresh round of questions over its moral value.

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