In something of a surprise today, corn prices gave back nearly all the gains they made in August, closing at the Chicago Board of Trade at $8.13/bushel. That’s a 12% drop in the last week and a 7% drop from the four-week average.

The blame (or credit, depending on one’s point of view) goes to lower-than-expected exports. In short, the high price for U.S. corn has stifled demand, at least from countries that import corn from the U.S.

Today’s news doesn’t really change the calculus for the next few months. Corn production will be significantly lower this year and demand, particularly from ethanol producers, is expected to continue at its current level.

It is possible — even likely — that ethanol makers have already bid up the price of corn in order to guarantee their supply. Government-mandated production levels guarantee ethanol producers a profit, no matter what price they pay for corn. When Congress returns from its August recess, expect some debate over the ethanol mandate, but don’t expect the mandate to be suspended without a fearsome struggle.

Paul Ausick