The prices of corn and vegetable oils have become linked to the cost of petroleum through biofuels, according to HighQuest Partners, Topsfield, Mass., a strategic advisory and management consulting firm. Traditional thinking is that the increased price of corn is a result of a number of complex factors: consumption in Asia, monetary policy, financial speculation, and energy consumption. This report contends that, while all of those factors are in play, the escalation in corn prices is, in reality, a matter of simple economics. Ethanol producers, who have pushed the demand for corn beyond the available supply, have become the price-setters, and the price they are setting is based on the price of petroleum. Markets are experiencing record six dollars per bushel corn prices because the link to petroleum was initially set when oil was $25 a barrel and corn was $2.50 a bushel. Now that oil is $100-plus, it is no surprise that corn is six dollars a bushel. Demand and supply responses to remedy price rises are limited, and would not move ethanol off the margin and break the link to petroleum prices, indicates Hunt Stookey, managing director at HighQuest.
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