May 15, 2008

 

Corn prices sharply undervalued compared to oil

 

 

Even as corn futures prices like crude oil prices have hit record highs in recent days, one analyst said the grain's price is sharply undervalued when comparing to oil in relative energy terms.

 

"Corn has energy value whether we like or not, so the market is increasingly willing to value it on that basis. If crude oil is worth US$120/barrel, the market is valuing oil at US$0.021 per thousand btus. If so, a bushel of corn would be worth US$8.20/bushel in terms of combustible value. We get similar value if we convert it into ethanol, but only if we include the US$0.51/gallon federal subsidy," said Robert Moskow, U.S. food and agribusiness analyst at Credit Suisse, in a research note.

 

Corn prices reached a record US$6.27 for the nearby contract while crude oil has topped US$126 a barrel and has bordered on US$127.

 

Ethanol producers, whose profit margins had been in the doldrums lately, may soon see a turnaround if crude oil prices stay high.

 

Moskow said if corn production were to falter this year, it would not be a stretch to see corn rising to US$8.

 

Ethanol has traded at a significant discount to gasoline - as much as US$1 without the credit - as result there has been a pick up in blending beyond subsidies or mandates, he said. Ethanol at US$2.51/gallon is now US$0.61/gallon cheaper than its closest substitute, wholesale gasoline at US$3.12/gallon," he wrote.

 

Meanwhile, the problem of overproduction, which has driven prices down lately, is also likely to subside.

 

Construction of new ethanol plants and expansions of existing ones have been curtailed.

 

As much as 40 percent of the original 5.1 billion gallons of additional ethanol capacity that the  Renewable Fuels Association said would come on line at the end of 2009, would have been delayed or cancelled, according to Credit Suisse.

 

That means capacity would reach 11.5 billion gallons for corn-based ethanol versus the current capacity of 8.5 billion gallons.

 

US$8 corn would hit meat producers such as Tyson, Pilgrim's Pride and Smithfield hard.

 

Biofuel is also not likely to lose the government's stamp of approval anytime soon, despite some murmurs in Congress on its impact on food prices, analysts at Credit Suisse said.

 

"It isn't going away, even with adverse global consequences," said Mark Flannery, global head of energy research at Credit Suisse.