Published: July 18, 2008 09:22 pm      

From the field to the gas tank

Corn and oil prices march to same beat

DANVILLE — Marketplace volatility may be neutralizing the skyrocketing farm commodities prices that occurred just after the June floods.

Meanwhile, record-setting oil prices finally made people limit their consumption of gasoline, thus helping bring about a decrease in oil prices, according to area agricul-tural economists.

The two commodities — corn and oil — are linked in ways they’ve never been before, they say.

“In the past, if you looked at the price of oil and the price of corn, they marched to different drummers,” said Purdue University Ag Economist Wallace Tyner.

Now, corn prices are linked to oil prices. As oil prices go up, gas prices rise. As gas prices rise, so does the demand for ethanol, which means more demand — and higher prices — for corn, he explained.

But lately, prices for corn have dropped for several reasons.

Purdue agricultural economist Chris Hurt said the favorable weather patterns emerged after the heavy rains and boosted crops — which are now well on their way into a healthy growing season.

The healthy plants have contributed to the decreasing prices, but so has consumer spending.

“When we got to those $7 (a bushel) prices, it seemed like we hit the wall in terms of end-users,” said Hurt, “like ethanol (plants). They were going to have to slow down and shut down, so they quit buying corn.”

The peak price for corn futures June 27 was $7.76, which has dropped almost 19 percent in the last three weeks.

Now, prices have gone down again. Prices just more than $6 are similar to what they were before the floods, Hurt said.

“(The flooding) occurred early enough that a good bit of flooded land was able to be replanted … the weather was pretty nice for late June and July and crop conditions did improve substantially.”

He calls this summer’s price dropping as recognition of regular marketplace ebbs and flows for the two now-connected commodities.

Last summer’s $3 gasoline did little to limit consumer spending, but when it went up another dollar, people began changing their habits, he said.

“Four-dollar gasoline seemed to have changed things,” Hurt said. “We’re seeing different kinds of discussions made.”

The $7 corn prices had the same effect. Corn consumers, whether ethanol or livestock producers, had to scale back perations.

Another factor that has affected decreasing corn prices is the extra acreage of wheat harvested this year. Wheat can be used for animal feed, Hurt said, therefore, making corn prices more manageable for farmers.

Unknown future

Recent oil price drops may show that moderation in commodities pricing is near.

“This is just maybe a hope that … we have made our peak prices in oil,” Hurt said.

If some moderation occurred, it could bring some stabilization to the agricultural industry, he said.

“Corn prices are now pretty highly tied to the market in the form of ethanol. If we could get some moderation or even some stability, that would be a big help as well,” Hurt said.

“Four-dollar (gasoline) did change American driving habits. We really did see changes in behavior. Three dollars a year ago didn’t do that.

“And what this may be saying is that there is just a level … it can get so high that we really begin to cut out consumption.”

Another consideration is the overall economy, which is weakening, he said.

If the country is in a recession, demand for products such as gasoline decreases, he said.

“It’s a bad way to solve the high prices of oil and high prices of corn, but it’s another element that is knocking on the door in the U.S. economy.”

If corn prices go down to levels closer to $5.50 a bushel, it may bring some relief for grocery consumers, he added.

University of Illinois agricultural economist Darrel Good agreed the corn and oil prices have kept things at least steady for most consumers, but the economy still is in a volatile state and demand for alternative fuels is likely to remain high.

“Margins in the ethanol business are tighter than they have been,” Good said.

“But for the (well-managed operating ethanol plant), I think margins are still in the black and the low corn prices we’ve experienced in the last couple weeks have probably helped their margins,” he said.

“Right now, it looks like demands should be pretty steady for the ethanol sector.”