Government energy policy in the United States and elsewhere might have a big impact on grain prices this year.
The cold, wet spring in the U.S. Midwest pushed corn prices to record highs in recent weeks and that helped lift the price of other crops such as canola and wheat.
The corn rally will force rationing and livestock markets are already adjusting to the expectation that herd reduction will get serious for the rest of this year.
Rationing has also hit the U.S. ethanol industry with some plants suspending operations because their biofuel production has become uneconomic.
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Such developments could become more common if bills before the U.S. Congress get anywhere.
Two Colorado congressmen have introduced a bill that would lower the tariff on imported ethanol to 45 cents per U.S. gallon from 54 cents. This would allow in additional cheap Brazilian ethanol, reducing the demand for American corn-based ethanol. A similar bill was also introduced in the Senate.
John McCain, the Republican presidential nominee, also wants to drop barriers to imported ethanol and says government policy should apply equally to all ethanol sources regardless of origin.
However, those who control the legislative agenda in Washington are steering the politically sensitive ethanol tariff bills into committees where they will sit until after the November election.
But once the campaigning is over this fall, the potential legislative threat to ethanol grows, especially if McCain is elected. If the new president is Barack Obama, a strong U.S. ethanol supporter, the legislative threat is not as strong.
The Chinese government is another policy maker that could indirectly affect grain prices.
In this case, it’s the Chinese policy of subsidizing fuel.
The rally in crude oil to almost $140 US per barrel has lent support to grain prices. Grain markets are affected by fuel prices because of the portion of grain and oilseed turned into biofuel and, more generally, because rallying oil prices draw investment into all commodities.
The oil market has seen a tug of war between those who believe a slowing U.S. economy will reduce oil demand and therefore prices and those who believe that Asian economic growth will offset the U.S. slowdown and keep oil prices high.
So far the latter have had the upper hand.
But in a surprise decision June 19, China chopped subsidies on fuel prices. This could put a big dent in Asian fuel use growth because other countries in the region have also been slicing into their fuel subsidies.
If Asian oil demand slows and America’s economic doldrums continue, oil prices could start to fall and that would weaken grain and oilseed prices.
But there is a caveat here, too. Some analysts say China’s action could increase oil demand. Refineries were constraining production because operations were not profitable at prices set by the state. Shortages had developed leading to lineups at pumps. Now production will be profitable, so production should increase and rationing at the pumps will end.
Time will tell which viewpoint is proven correct.
