Erratic behavior on the futures market for corn over the past few weeks is evidence that paper bushels, not ethanol, are driving corn prices, according to Renewable Fuels Association president and CEO Bob Dinneen.
“Corn futures prices have tumbled by $1/bushel just since March 3, as huge index and hedge funds and other large speculators are pulling out of the market as fast as they jumped into it last fall,” wrote Dinneen in a post on the RFA E-xchange blog this week. “While biofuel opponents have garishly attempted to blame ethanol for the recent run-up in corn prices, the speculative gyrations in the marketplace over the past several months underscore once again that the market is being driven by the whims of non-commercial investors who will never see a kernel of the corn they bet on from their Wall Street offices – so-called paper bushels.”
Dinneen says the big drop in price has been attributed to Japan. “The theory is that Japan, the world’s largest importer of U.S. corn, will dramatically cut back its shipments because major ports were damaged and demand has essentially frozen amidst the turmoil resulting from the earthquake and tsunami. But is it logical that the situation in Japan would curtail corn demand enough to knock $1 off of corn prices (about 14%) in a week’s time, especially when other demand underpinnings haven’t changed?”
The point is this: the market is extremely (and unnecessarily) jittery and volatile because any event that has even the slightest potential implications for corn use often triggers massive over-reaction by speculators. And they move like a flock of sheep; if the bellwether finds a hole in the woven wire, the rest of the flock is sure to quickly follow for fear of getting left behind.