Gas at $4 and Corn at $7

For the first time ever, with oil prices pushing $140/bbl on Friday, the U.S. national average price for gasoline cracked $4/gal:

Gas price record reaches $4 a gallon

NEW YORK ( — Gasoline rose to a milestone mark Sunday as the national average compiled by motorist group AAA reached $4 a gallon for the first time.

The national average for regular unleaded rose 1.7 cents to $4.005, according the daily measure on the group’s Web site. That surpassed the previous record of $3.989 set Thursday.

People are starting to get the message, as gasoline demand is softening. This week I had to rent a car. I had requested a small, fuel efficient model. Guess what? Fresh out. How about this Nissan Titan with a powerful V8 instead? Same price as the fuel efficient model. I took it, because 1). I don’t have to drive much while I have the vehicle; 2). I didn’t have much of a choice unless I wanted to go to another rental agency. Jet lag across seven time zones argued against that.

Corn also reached an all-time high of $7.01 a bushel:

U.S. corn soars above $7 as crude rockets

CHICAGO, June 6 (Reuters) – U.S. grains and oilseed futures markets caught fire on Friday, with corn notching an all-time high above $7 a bushel, caught in a frenzied broad-based commodity rally led by soaring crude oil, traders said.

Further boosting corn and soybean prices were worries about the young U.S. crops. Torrential rains pummeled the American heartland this week, increasing prospects for a yield drag on both.

“There are Noah’s Ark-like conditions in the Midwest through next week,” said Vic Lespinasse, analyst for

Farmers were hoping for ideal growing conditions this year given the huge world demand for grains and oilseed for food and feedstocks to produce biofuels.

Corn prices are caught up in a perfect storm. Of course high oil prices have a direct impact. The diversion of corn into biofuels has a direct impact. But I have warned and warned and warned that there was a very big potential danger from diverting food into fuel: A bad harvest would cause grain prices to spiral out of control. (See Unintended Consequences). I always used the example of a Midwest drought, but it looks like Midwest flooding is accomplishing the same objective. I also suggested that it would take something like this to cause us to reevaluate our biofuels policies.

A little over a year ago, I wrote an essay called The Mythical Ethanol Threat. At the time, corn was bouncing around $3.70/bu (Ref: Historical Commodity Futures Charts for Corn). After noting the number of new ethanol refineries under construction, and after repeatedly predicting (accurately, it turned out) that overbuilding would lead to additional ethanol mandates, I wrote – Note to self: Corn futures to double again by 2009. Another $0.20, and that milestone will be reached.

16 thoughts on “Gas at $4 and Corn at $7”

  1. Hey.. You also spent a lot of time going on about how rich corn farmers were going to get from high corn prices.

    There are a lot of folks out in the US Midwest that sunk $600/acre for rent and inputs on their corn land that have a total write-off due to unusual rainfall, but it could have been drought or disease or many other things. Drought is mitigated on irrigated land and only cuts into the bottom line (due to pumping cost) unless their aquifer dries up.

    This is the point that I was making all along. Corn ethanol is stupid as fuel, but commodity prices above the long term cost of production (including bad years) are very important and corn ethanol helped achieve that.

    With NG and diesel prices doubling in the last year, $7/bu corn is still too cheap to keep farming sustainable with current practices.

  2. Hey.. You also spent a lot of time going on about how rich corn farmers were going to get from high corn prices.

    Bob, the last couple of years, BP had a lot of problems that helped lead to a gasoline shortage. All of the oil companies benefited, but even BP did well during that time. My point is, the crop problems won’t affect a significant portion of the total crop, and the shortage will indeed make some farmers a whole lot of money. Only if a farmer loses their entire crop and doesn’t have crop insurance is the flooding going to have a major negative impact on their operations.

    Speaking of corn, driving around North Texas, I have never seen as much corn planted here as there is this year.

    With NG and diesel prices doubling in the last year, $7/bu corn is still too cheap to keep farming sustainable with current practices.

    I need to calculate the BTU value of corn. I have heard some comment that compared to oil, you get a much greater value for the BTUs in corn.

    Cheers, RR

  3. A few years back I asked an aggie prof (UT system) how much land a corn farmer had to have to survive. He answered “2000 acres.” Corn farmers netted $25 an acre.
    Now, corn farmers are netting $250 an acre, or more. Mercy, they must be making money. Time to set up a luxury tractor dealership in Cornland.
    It is true, thinks look grim now for consumers of commodities. But commodities are always driven by booms and busts.
    Gasoline demand is down five percent now from last year, and I suspect another five percent by next year. As higher mpg models supplant lower mpg models, and drivers make other adjustments (I am inflating my tires religiously) we can expect demand to go down several percent a year for a long, long time. I predict in seven years there will be talk of shutting refineries down for lack of demand.
    Because the run-up in prices was relatively sudden, and happened after a 20-year run of cheap oil, it is hitting hard.
    But ajustments will be made, and actually I suspect a glut will happen. A smart energy policy would be to start taxing oil as the market price dips, to keep the pressure on demand downward.
    That position will not get you lelected as President.

  4. I think JOGMEC is injecting hot water in the bore hole and using a suction pump to lower the atmospheric pressure on the methane hydrates. The suction pump brings up natural gas and water. The water can be heated and re-injected. If it really is that simple,I’d really like to short natural gas futures. Anybody know more about this?

  5. At $25/acre “profit”, everyone left the farm and the average operator age is way past 50. This is a real problem. Corn ethanol will solve itself on $7/bu corn, and regardless of mandates and blender’s subsidies, the ethanol plants will shut down.

    In some ways, ethanol has a purpose. The wheat ethanol plant that was built locally was just finished as feed wheat went from $2 to $6/bu. They are going to have a very difficult time staying open the first year, regardless of gasoline price. They use feed wheat, not miller grade wheat and some years in Western Canada, there is a surplus of feed wheat (due to early frost or poor harvest conditions) and nobody knows what to do with it and it’s worthless. Having some idling wheat ethanol capacity is good for those years when there is a surplus of feed wheat.

    I would think that idling corn ethanol capacity (without mandates and subsidies) has a place in the agricultural picture for years when there is surplus crop. If there isn’t something in place to use up surplus, the price falls right out and then the gov. gets into the direct subsidy business trying to keep the farms from going under.

    Anyway, my point of view is from Canada where agriculture is indirectly affected by US policy. What has been happening locally is that for once people have been moving back to rural Saskatchewan. There were many towns selling empty lots for $1/foot frontage ($50 for 50′ lot) that are now selling for a few thousand a lot. This is far from a rural boom, but for the first time in my 40 years of existence, people are moving back to the farms and small towns.

  6. Ethanol isn’t going away until refiners find a better substitute Bob. MTBE has been outlawed in most states. I don’t see the need for subsidies either. $10 a gallon ethanol would only add about 60 cents to the cost of a gallon of gas. Gas prices climb that much every other week anyway…LOL.

  7. Here’s a theory: Let’s say that corn goes to the inflation adjusted 1973 price of $17/bu. There is going to be a lot of bellyaching from the corn ethanol plants and bail-out requests, but the economics are going out the window for corn ethanol. When the smoke clears, maybe it’s possible to feasibly and sustainably possible make ethanol from cellulose or potatoes or sugarbeets or feed wheat.

    Corn ethanol was feasible with the $0.50/gal blender’s subsidy, $2/bu corn and $2/gal gasoline.

    It’s a new model with $4/gal gasoline and corn at $7/bu and both climbing. Food->Fuel is dumb on a grand scale, but it’s a good way to stabilize the food commodity market when there are surpluses.

  8. driving around North Texas, I have never seen as much corn planted here as there is this year.

    Could be. But the USDA says total US corn acreage will be down 8% this year vs. last. Switching soybean and wheat acreage to corn in ’07 drove prices of those foods up to the point where it made economic sense to switch some back.

  9. Bob,we should drop ethanol subsidies,stop ethanol tariffs,and let free markets do their thing. I don’t see ethanol production shutting down with $7/bu corn,or even $25/bu. Refiners have to comply with the Clean Air Act,and ethanol is the only game in town.

  10. Robert,I’m surprised you haven’t said anything about the worlds first well production of methane hydrates. Japan is already talking about sharing the technology with South Korea and China. For a price,of course. I may’ve been wrong about JOGMEC using hot water,although they did last time around. Looks like they just used some kind of suction pump this time. There’s an awful lot of methane hydrate out there. If Japan found a cheap way to get it up,we could see some real relief in coming years.

  11. Switching soybean and wheat acreage to corn in ’07 drove prices of those foods up to the point…

    Although this is true, I think a larger factor in cereal prices is that the US isn’t dumping $2/bu corn on the market. You can feed barley, oats and wheat relatively interchangeably and as the corn surplus was used up, the value of these other commodities rose. In Saskatchewan (which grows 1/5 as much wheat as the entire USA) low wheat price meant more high input pulse and oilseed crops. An increase in the price of wheat means less of those crops are grown, but it all ties back to the corn surplus and that surplus has screwed up agricultural profitability in North America for the last 30 years. Ethanol was the best thing to happen, because no one had the balls to just dump 20% of the US corn crop in the ocean and the endless cycle of subsidies and over-production haven’t helped the long term sustainability, which requires profitability and young people interested in farming.

  12. Sonoma, California – May 28, 2008 –Sapphire Energy announced today they have produced renewable 91 octane gasoline that conforms to ASTM certification, made from a breakthrough process that produces crude oil directly from sunlight, CO2 and photosynthetic microorganisms, beginning with algae.

  13. “Pyle wouldn’t cite the price tag for producing a barrel of green crude, but he described the expected cost as competitive with extracting oil from deep-water deposits and oil sands. The company already has produced green versions of jet fuel, diesel and clear, premium-grade gasoline, he said.”

  14. Crude Oil Declines as Traders View $139 Record as Excessive(bloomberg)
    no kidding..

    I think the major drawback to cheap petroleum over the last several decades is that it allowed urbanization of society. There are way too many people in jobs that add no value to the human race.

    I thinking hitching up a couple of dozen financial analysts to a 3 furrow plow is the preferred farming method of the future. Hand Stooking wheat sounds like a nice advanced MBA class.

  15. Maury, ethanol does not help meet Clean Air Act. In fact, ethanol-blended gasoline receives waivers from vapor pressure regulations.

    Ethanol required as a blending component is much less than Congressionally-mandate levels.

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