Are grain markets becoming a farce?
There are some ridiculous things developing in the US grain markets. The most recent was released Monday afternoon, with a Commitment of Traders Supplemental report showing for the first time how much index funds own of 12 major agricultural commodities.
The numbers were astoundingly large, with 422,000 contracts (2.11 billion bu) owned of corn, 201,000 contracts of CBOT wheat (Over 1 billion bu), and 130,000 contracts of soybeans (650 mb). These are very large numbers, and net showed that index funds and the normal speculative branch own much more grains than anyone had thought. Initially, the market reacted negatively to this news. But, the reality is that the speculative element has perhaps a larger hand in grain price movements (and other ag commodities) than anyone imagined.
This is a little unsettling to the producers of these commodities, as the realization of the sheer size of fund purchasing power is emphasized. Some estimates indicate index funds might have 100 billion dollars or more of invested funds in just the 12 agricultural commodities. The energies and metals were not included in these numbers, and its likely they weren't because the index fund involvement in these markets might actually be even larger than in the ag commodities.
Now we add the above speculative trade importance to another situation which Chief USDA Economist Keith Collins calls the 'elephant' of the market, ethanol. Ethanol production is on a 'break-neck path' Collins was quoted to say this week, with capacity soaring. The past 6 months development has meant 4 billion more gallons of ethanol capacity which could consume up to 1.5 billion bushels of corn once they are on-line, according to Collins.
Add that to the other projections out there, one from the Earth Policy Institute's Lester Brown, and the problem could become a farce! Brown's estimates included that at the current pace of development, 5.5 billion bushels of corn would be needed for ethanol production in the crop year 2008. Brown's estimates were based upon 116 existing plants (vs 106 in Sept/Oct), 79 under construction, 11 expanding, and 200 in the planning stages. He assumed that all these plants would be done by 2008 harvest, but right now its still questionable whether the 200 could be completed.
Actually, the other numbers Brown cites are more or less confirmed (or at least supported) by the DTN Ethanol Center estimates of 119 plants now on-line, 67 under construction, and 260 in the planning stages. The more conservative Renewable Fuels Association claims that 110 plants are in operation, 73 under construction, and 8 in expansion - but they don't estimate the number in planning stages. Bill Tierney, former USDA and Kansas State University marketing expert and currently with John Stewart and Associates, claims that if all current plants are built that are being planned, we'd have 40 billion gallons of production (at least 35 billion) "not counting the multiple plants and companies that are saying they are going to build". Tierney's number is impressive considering that would mean 13.3 billion bushels of corn capacity for ethanol. Obviously, the US has never even produced 13 billion bushels in one year, so is this number a 'farce'?