Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Corn Is the New Copper
Transcript
- Lucas: So corn futures just had their best week in months, up about nine percent, to a touch over five dollars a bushel. And the interesting part is it's happening while oil is basically flat, down one percent over the same stretch. That's a pretty unusual divergence. Luna: Right, and I keep seeing headlines about corn being the new oil. But is there actually something to that, or is it just a catchy phrase? Lucas: It's more than catchy, actually. Corn is literally the feed stock for ethanol, which is blended into most of the gasoline we burn. So when corn prices move, it ripples right into energy markets. And this week, it wasn't just some random supply blip. We've got the U.S. Midwest in the middle of a pretty severe drought, and that's hitting the corn crop just as it's pollinating, which is the most sensitive stage. Lucas: Also, we've seen China step up their buying quite aggressively. They're rebuilding their hog herd after African swine fever, and that means they need feed corn, and a lot of it. So you've got a supply shock on one side and a demand boost on the other. That combo is why the contract surged. Luna: That makes sense. And before we dive deeper, I want to echo something Lucas and I often mention, but it's worth saying again. This show is listener-supported, no ads, and that's thanks to a handful of folks who chip in a few bucks a month. If you've gotten value from these episodes, you can support us at buy me a coffee dot com slash fexingo. It's what keeps us going, and we're grateful for every bit. Lucas: Yeah, we really do appreciate it. But let's get back to the corn story, because there's a bigger point here that ties into the broader economy. The CPI released last month showed inflation cooling, core at 2.4 percent, but corn is up almost nine percent in a week. That's a disconnect that matters for how the Fed thinks about policy. Luna: How so? Isn't food just one component of the basket? Lucas: It is, and it's actually a smaller weight than you'd think, around 13 percent of the CPI. But here's the thing: corn isn't just food. It's in everything from high-fructose corn syrup to livestock feed to ethanol. So when corn spikes, it feeds into a whole pipeline of prices. You've got the direct food effect, but also the energy effect through ethanol, and that can linger. Luna: So even if the CPI number comes in cool, a spike in corn could be an early warning that food inflation is about to pick back up. Lucas: Exactly. And that's why we're calling corn the new copper. Copper's long been seen as a barometer for the global economy, Dr. Copper they call it, because it's used in everything from wiring to construction. Corn is starting to play a similar role in the inflation complex. It's a canary in the coal mine for food and energy prices. Luna: I've also heard that corn and oil prices are actually decoupling, that corn is marching to its own beat. How does that play out? Lucas: Well, they're not perfectly correlated, but there's a structural link through ethanol. The government mandates that a certain volume of ethanol be blended into gasoline, and that creates a hard floor for corn demand that's pretty insensitive to price. So even when oil prices drop, the ethanol mandate keeps corn demand steady. But this week, oil is flat while corn is up, and that's because the supply shock is hitting corn specifically, not oil. Luna: So it's not that corn is replacing oil, it's that corn has its own supply and demand dynamics that are dominating right now. Lucas: Right. And that's why you can't just look at the oil market to understand where inflation is heading. You've got to watch the grains, too. I mean, look at the numbers, corn is up 8.9 percent on the week, wheat is up 3 percent, and soybeans are up 0.3 percent. It's not all grains rallying, corn is the standout. So there's something specific to corn here. Luna: What's the latest on the crop conditions? I saw a headline about the drought in the Midwest, but what's the actual USDA assessment? Lucas: The USDA's most recent crop progress report showed that only about 62 percent of the corn crop is in good to excellent condition, which is down from 68 percent the week before. That's a pretty sharp drop for a single week. And it's concentrated in Iowa, Illinois, and Indiana, which are the top producing states. The drought index is showing severe to extreme conditions across a big chunk of the Corn Belt, and with pollination happening right now, that's a big deal. Luna: So the market is pricing in a lower yield, but what about the demand side? You mentioned China, but there's also the ethanol demand from the U.S. itself. Lucas: Right, the U.S. ethanol industry is running at near capacity, and with the summer driving season, gasoline demand is strong, which means ethanol blending is robust. So you've got a domestic demand engine that's not going to slow down. And on top of that, China has been buying U.S. corn in huge volumes, they've booked over ten million tonnes for the 2026-27 marketing year, which is already ahead of last year's pace. So the demand side is solid, but the supply side is getting squeezed. Luna: And that's why we're seeing corn at five dollars, which is a psychological level that hasn't been tested in a while. Lucas: Yeah, five dollars is a big level, and it held. But the question is, how high can it go? The market is now pricing in a yield of around 175 bushels per acre, which is down from the trend of 181. If the drought persists, that could drop further. And we've seen in past years, like 2012, when the Midwest drought sent corn up to over eight dollars a bushel. So there's precedent for a really sharp move. Luna: eight dollars, that's a huge number. But what's the chance we see that kind of move again? Is that even in the realm of possibility? Lucas: It's not the base case, but it's not out of the question if the drought persists. The market is pricing in about a 10 to 15 percent probability of a severe yield shortfall, but that could change with one more hot, dry week. And the big thing to watch is the weather forecast for the next two weeks, because that's when the corn is really setting the kernel. If it stays hot and dry, we could see the market start to price in a more extreme scenario. Luna: So what does this mean for the average consumer? Are we going to see higher food prices at the grocery store? Lucas: It's not immediate, but it will filter through. Corn is used to feed cattle, hogs, and chickens, so meat prices could go up in a few months. And of course, anything with high-fructose corn syrup, so sodas and processed foods, could see some pressure. But the bigger risk is if this corn spike is the start of a broader agricultural rally. Wheat is up too, and soybeans could follow. And if that happens, you're looking at a food inflation problem that the Fed can't ignore. Luna: And that's the key, right? Because the Fed is focused on core inflation, which excludes food and energy, but if food prices keep rising, it becomes a political issue and a problem for consumers, even if it's not in the core number. Lucas: Exactly. And that's why I think corn is becoming a more important indicator to watch than copper. Copper signals industrial demand, but corn signals the cost of living. And right now, corn is telling us that the cost of living is going up, despite what the headline CPI says. Luna: So if you're an investor, how do you play corn? Is it just through futures, or are there other ways? Lucas: Well, there are ETFs that track corn, like the Teucrium Corn Fund, ticker c o r n, but those can be tricky because of contango and the way they roll futures. For most investors, it's probably easier to look at ag stocks, like seed and fertilizer companies, or maybe the grain elevators. But honestly, I think the bigger takeaway here is for anyone watching the economy, corn is a number you should be tracking, not just as a trader, but as an economic indicator. Luna: That's a good way to put it. And we should also mention that this isn't just a U.S. story. We're seeing corn prices rally globally, with Chicago futures leading the way, and that's affecting markets from Brazil to Ukraine. Lucas: Right, and Brazil is actually having a record corn crop, but they're also exporting a lot, so they're not providing a buffer. And Ukraine, despite the war, has been exporting quite a bit, but the infrastructure is fragile. So the global supply picture is tighter than it looks. Luna: So, quick question, what's the one thing you'd tell someone who asks, what's the deal with corn? Lucas: I'd say, corn is the new copper. It's a bellwether for the cost of living, and right now it's ringing an alarm bell. The drought in the Midwest is real, and it's tightening supply at a time when demand is strong, both from ethanol and from China. That's a recipe for higher prices, and it's going to show up in your grocery bill sooner than you think.