26 June 2020
The significant drop in the price of corn during the initial stage of the COVID-19 pandemic was a shock to traders, analysts and consumers alike. Typically, the price of corn maintains a risk premium heading into the summer growing season in the US, but due to massive demand destruction and speculative capital taking a large short position, the price eroded very quickly.
Most corn produced in the US and globally is used for animal feed i.e., for poultry, hog and cattle production. The latest figures suggest about 65 per cent of corn produced globally will be used for animal feed (source: United States Department of Agriculture). However, with many meatpacking plants in the US initially forced to close due to the spread of COVID-19, demand for corn feed plummeted. Similarly, the main source of ethanol fuel is corn and as a result of COVID-19 lockdowns changing our way of life, including less driving, gasoline demand fell sharply. The first week of April was the trough in US gasoline demand, down 48 per cent versus the prior year (source: US Energy Information Administration).
With this drop in demand and corresponding drop in prices, the economic returns of corn have decreased relative to other crops. The production of next season’s corn crop will most likely be lower. This is a deliberate shift brought about by market forces. Supplies of corn have grown much faster than demand, resulting in less potential revenue for physical traders, storage operators, and shippers. The economic returns will come from competing crops, such as soybean, wheat and cotton.
One segment of the market that will benefit from lower prices over the longer term are ethanol producers, animal producers and consumer-packaged goods companies. By forward hedging the lower prices, they will be able to increase their margins in the future as well as offer cheaper goods to end consumers.
On the other hand, with the increased likelihood of next season’s corn crop to be being lower than the previous year, there could be a corresponding drop in ethanol production. Ethanol produced from corn is considered by many to be a lower-carbon and “greener” source of fuel. A 2017 joint report from ICF and USDA showed that using ethanol from a new natural-gas-fired plant has a 21 per cent reduction in GHG emissions than using gasoline. However, without a corresponding decrease in gasoline demand, we could see a higher percentage of petroleum-derived fuel being used.
Chase Bender, Macquarie agricultural commodities analyst