As producers make their marketing plans ahead of spring planting, they should keep an eye on three key drivers of commodity prices
: global economic growth, the weakening of the dollar and biofuels policy.
"We have reached a new plateau grain markets and everyone is trying to figure out the average price for corn," noted William Lapp, grain economist with Advanced Economic Solutions. Lapp spoke at the Bayer CropScience Ag Issues Forum in Nashville, Tenn., ahead of the 2012 Commodity Classic. "The reality is there is only so much corn and different interests are going to fight for it."
Lapp believes biofuels policy, particularly regarding the ethanol mandate, could be the single biggest driver for grain prices. He projects a shortfall to meet the cellulosic ethanol mandate, which may cause the mandate to be rejected by policymakers in the future. Add to that the ethanol blend wall with E15 and biodiesel mandate adjustments, and the grain industry could be in for some significant market swings.
"Biofuels policy is going to be a pretty big battle," Lapp says. "We have seen the price of biodiesel go to a tremendous premium because of the mandates, and there are a lot of interests that have to be served regarding biofuels policy."
No one knows for sure how the policy will shape up, but Lapp firmly believes there should be more flexibility added in to any future ethanol mandate. Currently, there is no ability to adjust the mandate in a short corn year.
"This doesn’t do anyone any good; it’s a sure way to reduce livestock production and raises food prices," Lapp says. "A legislative mandate needs to have some off ramps to adjust those levels for a period of time so you are not shorting the market of corn for an entire year to meet a mandate." The Environmental Protection Agency currently has the authority to reduce levels in the ethanol mandate, but from a political standpoint it’s not easily done, Lapp adds.
All eyes will be focused on biofuels this spring as crude oil prices climb past $106 a barrel. "When we have $4 gas in the U.S., you can almost hear the tires screeching," Lapp says. "You can bet ethanol will be talked about in Congress this year."