Ethanol is NOT the Answer
By Jim Comiskey ISSUE 704 | APRIL 2008
I think it's now beyond a doubt that current congressional mandates dictating ethanol use are having a tremendous impact on soaring food prices. The current futures price on corn is essentially at an all-time record high. December corn futures closed at around $6.10 per bushel on April 25, just shy of its all-time high April 17 at $6.23. The price of soybeans, wheat and rice are similarly at all-time highs.
December Corn Futures, Daily
June Dollar Index Futures, Daily
One could clearly say that the record low in the U.S. dollar (approximately 72 cents per euro) is the main driver behind this price movement. However, the Energy Independence and Security Act of 2007 sets the target for ethanol usage at 36 billion gallons of biofuels/ethanol per year by 2022. I don't believe this level will reduce our reliance on crude oil, as that amount would equal only 18 percent (by volume) of America's oil imports.
As mentioned, the falling value of the dollar is one of the most notable factors behind the current run-up in grains. Yet, there are other factors as well: a growing global demand for grain from China and India in particular, higher energy costs, and poor harvests in the Ukraine and Australia. Cold, wet weather in the U.S. this spring has impeded planting progress and kept grains bid. But there is no question in my mind that the ethanol mandates are a key factor in the rising cost of grains. The consequences of rising food prices are troubling, as evidenced by food riots in several countries in the last couple of months.
As John McCain said in 2003, "Plain and simple, the ethanol program is highway robbery perpetrated on the American public by Congress." Last month, the USDA reported that global grain demand is estimated to grow by 5.4 percent this year. Fully half of that growth will come from U.S. consumption of corn for ethanol.
So, you're probably asking yourself how you can exploit possible opportunities based on these facts, by trading futures. I would recommend attempting a "buy and hold" trading strategy, particularly in corn. This can be accomplished in numerous ways via the purchase of either outright futures contracts or long-dated call options. One caveat I would add here is that futures trading carries with it substantial risk so please feel free to contact me so that we can discuss this further.
Keep in mind, this week we have a very important Federal Reserve meeting that concludes Wednesday. Market participants are speculating about whether the Fed's long-running easing cycle will come to an end. I think it will be "one and done" as far as the Fed. In other words, I think it will signal this will be the last ease of the cycle.
If you trade commodities, you have to be cognizant of the impact of potential Fed action on the markets. The big long-based funds that have been a force in these markets might jump out of many commodities, because it should spike the dollar. That could trigger some short-term corrections.
However, I see the longer-term trend, particularly in corn, as very clearly upwards. Afterall, the U.S. Department of Agriculture estimated that with soybeans as rich as they are, 11 million acres will be shifted out of corn and into soybeans. That's a heck of a lot of acres. In addition, soybeans actually put nitrogen back into the soil, and with the price of fertilizer at almost all-time record highs, it's a "double" benefit to farmers.
Jim Comiskey is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 888-800-5373 or via email at jcomiskey@lind-waldock.com.
Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.
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