Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Corn Prices Are Falling as Ethanol Demand Weakens
Transcript
- Lucas: Corn is down one point six percent over the past five days, and if you zoom out, it's been sliding for most of May. The question is why — because this isn't a weather story, at least not yet. Luna: Right, we've got planting delays in parts of the Midwest, but the market seems to be shrugging that off. So what's the bigger force? Lucas: Ethanol. Roughly 40 percent of US corn goes into ethanol production, and the demand picture there is getting noticeably weaker. Gasoline consumption is softening — partly because of higher pump prices, partly because the economy is slowing just enough that people are driving less. Luna: And the CPI data we got in April showed prices still creeping up — core CPI at 335.4, up from 334.17. That's not a shock, but it does keep pressure on consumers. Lucas: Exactly. So when you combine that with the 10-year breakeven inflation rate sitting at 2.40 percent — basically unchanged — the market is saying inflation is sticky, not accelerating. That means the Fed is probably done hiking, but rates stay high. And high rates discourage big spending, including on road trips and diesel-hauling freight. Luna: So less gasoline demand means less ethanol demand, which means less corn being ground up. But is it just demand, or is there a supply glut building too? Lucas: Both. The USDA's May WASDE report projected a 2026 corn crop of 15.8 billion bushels. That's big. And even though planting has been delayed in Iowa and Illinois, the overall acreage intention was high. If we get a normal growing season from here, we could see the biggest corn supply in years. Luna: Right, and in the meantime, ethanol margins are getting squeezed. I was looking at some data from POET and Valero's ethanol plants — they're seeing narrower margins because corn prices aren't falling fast enough relative to ethanol prices. Lucas: That's the squeeze. Ethanol prices have fallen faster than corn, partly because of cheaper Brazilian ethanol hitting the Gulf Coast. Brazil's sugarcane-based ethanol is cost-competitive right now, and it's displacing some US corn ethanol in the blending pool. Luna: So you've got a triple headwind: lower gasoline consumption, flat blending mandates under the Renewable Fuel Standard, and import competition. That's a tough setup for corn bulls. Lucas: Yeah, and it's worth noting that the RFS mandates haven't changed. The EPA proposed the same volume requirements for 2026 as 2025 — about 15 billion gallons of conventional ethanol. No growth. So the demand ceiling is fixed, and we're bumping up against it. Luna: That is exactly the kind of thing — if walking through the economy with us has made something click, there's a small way to keep this show ad-free and independent. We're at buy me a coffee dot com slash fexingo. No pressure, just if it's useful. Lucas: Yeah, we keep it going because of listeners who chip in. Appreciate it. So — back to corn. The interesting question is whether this is a seasonal dip or something more structural. Luna: What's the case for structural? I mean, ethanol demand has been flat for years now, but corn always finds a home somewhere. Lucas: Right, the other big demand bucket is livestock feed. And with cattle herds still relatively small after the 2023-2024 liquidation, feed demand isn't surging. The USDA is projecting a slight increase in hog and poultry numbers, but not enough to absorb a 15.8-billion-bushel crop. Luna: So the only real wildcard is exports. Are we selling corn to China or Mexico like we were a couple years ago? Lucas: Exports have been steady but not spectacular. China has been buying more Brazilian corn because it's cheaper. The US is still the top exporter, but our market share is eroding. Mexico is a reliable buyer, but they're not increasing volumes dramatically. Luna: So if demand is flat to down and supply is potentially record-large, the path of least resistance for corn prices is lower. But does that mean we should expect a crash? Lucas: Not necessarily a crash, because there's a cost floor. Corn production costs are around $4.00 to $4.20 per bushel for most farmers. Below that, they'll start cutting acreage next year. So the market is pricing in a slow grind lower, not a collapse. Luna: Still, for anyone holding corn futures or ag stocks, this is a rough stretch. The XLE and XOP are down more than 5 percent this week, and grain stocks are feeling the heat too. Lucas: Yeah, fertilizer stocks are especially exposed. Companies like CF Industries and Mosaic — if corn acres shrink next year, demand for nitrogen and potash drops. That's a second-order effect that could linger. Luna: Interesting. So the corn ethanol story is really a chain reaction: low gasoline demand, higher ethanol imports, flat mandates, big crop potential. Each link reinforces the next. Lucas: Exactly. And it's not just about corn. It's about how energy policy, trade flows, and consumer behavior intersect in one commodity. That's what makes this market fascinating. Luna: All right, so what are you watching in the next month? The June WASDE report? Planting progress? Lucas: Both. But also the ethanol production numbers that come out every Wednesday from the EIA. If we see ethanol output dropping below a million barrels per day for several weeks in a row, that's a real signal that the demand weakness is entrenched. Luna: And if we get a heat wave in July that threatens yields, the whole narrative flips overnight. Lucas: Right, that's the nature of commodities. You can have a bearish thesis for months, and then one weather map changes everything. But right now, the data points lower. Luna: Good episode topic. I feel like I understand the ethanol-corn connection a lot better now. Lucas: Glad to hear it. Next time we'll look at what's happening in the natural gas market — it's been range-bound around three dollars, but some interesting storage dynamics are brewing.