May 04, 2010
The Ethanol Blame Game Continues (DTN)
The livestock industry's battle cry over the past several years has been that ethanol production has created higher corn prices and is pushing meat prices higher for the consumer. This cry was heard loud and clear last week when Bloomberg News ran a story about the rising price of meat over the past several months. The article does focus on the increased demand for meat and tighter supplies, but a significant theme that is emphasized and the one that had been picked up by network news was that ethanol demand has pushed food prices higher. This argument was most prevalent in 2008, when all commodities moved sharply higher, only to come tumbling down following the crash of the stock market.
But this time around when beef prices are at levels not seen since the summer of 2008, ethanol demand is not the driver of the higher prices. If ethanol production were the significant driver of beef prices over the last several months, simple supply and demand relationships would expect that if the demand was driving the market, then corn prices would also be rallying. But that is not the case. From the first of the year through the end of April, corn prices have fallen 48 cents per bushel, from $4.14 to $3.66 per bushel. This slide in corn prices comes following near-record corn production over the last year, as well as significantly higher carry-out stocks that have created a surplus of corn in the market through the first half of 2010. Ethanol prices have also worked lower through the first four months of the year, driven by tighter margins and lower moving corn prices. The live cattle market on the other hand has skyrocketed higher, driving prices near $100 per cwt. This is a $20 rally in live cattle prices over the past four months which continues to keep beef prices supported.
If demand and production of ethanol is not the key factor in the rise in beef prices, what is the reason? Overall demand for beef and the expectation of tight supplies are drawing both commercial and investment traders quickly into the market. In many ways, the live cattle market has been the commodity market of choice for many investment funds through the first four months of 2010. This is evidenced by the increase in total open interest in the live cattle market which increased 43 percent from the first of the year, moving from 261,953 positions, to a record 374,680 positions at the end of April. This flood of new money jumping into the market has significantly changed the outlook of the industry. There also are expectations for increased demand through the summer months due to the improvements in the economy. But, the lion's share of the market rally has come at the hands of investment trade interests jumping into the market. This investment interest is also evidenced by the net position of large funds as measured by the CFTC. The positions by this group of traders has moved from a net short position at the end of July of nearly 20,000 contracts to a net-long position at the end of April to nearly 95,000 contracts. This move (as illustrated by the accompanying chart on the web) follows step-by-step with the price rally in the live cattle futures market over the last four months.
Ethanol continues to be the whipping boy, but blaming the fuel for today's higher meat prices just doesn't add up. ...
