CHICAGO - Heavy demand for corn from ethanol makers was seen as a key driver of corn futures to record highs in June, but since then the sharp decline of corn along with other commodities shows that belief was mistaken.

Corn is down about 50 percent from its record high in June, even as the amount of the grain used to produce the renewable fuel in the United States remained the same. "The record high prices were a speculative bubble," said Stewart Ramsey, senior economist for Global Insight, Philadelphia (www.globalinsight.com/)

US food prices, which normally rise by about 2.5 percent a year, surged by 4 percent in 2007, the biggest increase in 17 years. World food prices jumped a stunning 40 percent, causing food riots, hoarding and bread lines in some countries. The government has forecast that US food prices will rise 5.5 percent this year and 4.5 percent in 2009. Chicago Board of Trade corn futures set a record high $7.65 per bushel for a spot contract at the end of June.

When the spot contract's price for corn has been halved to $3.85 per bushel, the price of Ethanol remains virtually unchanged, there is an indication that one price is not tied to the other.  It becomes impossible to support the Analysts' view that Ethanol adds 75 cents to $1.00 per bushel to the price of corn.

MONEY SHIFT TO COMMODITIES KEY REASON FOR PRICE GAINS

Analysts said soaring corn prices were a symptom of big shifts of investment money into corn and other commodities. As big money began shifting out of stocks a few years ago, commodity markets like corn futures began climbing. "There was a speculative bubble in the market and that's one of the biggest things that came out of the market is just that equity markets weren't good and for a while the money came into commodities," Ramsay said.

By mid-February non-commercial investors, including speculators, index and hedge funds and managed pools of money, held nearly 484,000 long positions in CBOT corn futures or 2.42 billion bushels of corn.

That would be enough to produce more than 6.7 billion gallons of ethanol and more than 20 million tonnes of livestock feed, according to the Renewable Fuels Association, Washington D.C. By October those investors held about 240,000 long positions in the corn market, less than half the levels seen in the spring and early summer, the RFA said.

"We had adequate corn stocks, there was no shortage of corn, that wasn't the issue," said Don Roose, analyst and president of US Commodities, West Des Moines, Iowa. "What we got into is the dollar went so low, crude oil went up and that inflated a lot of things...it was that factor of the least resistance moving up...it was an all-in attitude in the commodity markets in general no matter what it was."

US capacity to make ethanol has risen about 60 percent since last year to about 11.2 billion gallons per year and if all the new plants and expansions come on line total US capacity would be about 13.8 billion gpy.

(Reporting by Sam Nelson; Editing by David Gregorio)
Story by Sam Nelson - REUTERS NEWS SERVICE