GoodFuels

Bursting Bubbles

Record high prices for commodities this year were a “speculative bubble,” according to an economic analyst quoted in a Reuters report today.

Heavy demand for corn from ethanol makers was seen as a key driver of corn futures to record highs in June, but since then the sharp decline of corn along with other commodities shows that belief was mistaken. Corn is down about 50 percent from its record high in June, even as the amount of the grain used to produce the renewable fuel in the United States remained the same.

The article quotes Stewart Ramsey, senior economist for Global Insight, a Philadelphia-based company that provides economic, financial, and political analysis and forecasting.

Analysts said soaring corn prices were a symptom of big shifts of investment money into corn and other commodities. As big money began shifting out of stocks a few years ago, commodity markets like corn futures began climbing. “There was a speculative bubble in the market and that’s one of the bigget things that came out of the market is just that equity markets weren’t good and for a while the money came into commodities,” Ramsay said.

Now, you would think that would burst the bubble of food manufacturers intent on blaming ethanol for the crisis earlier this year. Not so. Just today Hormel released the 2008 Hormel Hunger Survey that claims, “Most Americans (67 percent) say that food prices have increased a lot since last year, and six out of 10 Americans (61 percent) say that corn-based ethanol is at least partly responsible for higher food prices.”

Hormel reported at 14 percent increase in profits during the second quarter of this year - right at the height of the food price hysteria elevated by the food companies. While the company’s profits did drop in the third quarter, overall profits are expected to be up for 2008. Other food companies - like Kraft, General Mills, and Nestle - are all forecast to make a profit this year. Especially now that they have higher prices for their products and suddenly dramatically lower input costs for energy and raw commodities.