Corn as a Commodity

CORN CRUSH SPREADcorn as a CommodityCorn is among the most versatile and complex grains in the worldIn many parts of the world, it is known as maizeCorns uses ranges from making the feed for livestock, to the corn syrup used in our processed foods and beveragesCorn is also being increasingly used to produce ethanolWith 270 million metric tons of corn produced annually in the U.S. alone, corn could be considered the most important grain crop on the planetWith so much acreage devoted to corn, this adaptable grain has clearly become a staple in the diets of people throughout the world

Factors determining Price of CornPrices are determined by the interaction of the supply and demand functionsHistorically, corn prices have also been influenced by government agricultural policiesMany seasonal, cyclical, and fundamental factors affect the corn price; for example: corn prices are typically lowest at harvest and trend higher during the year as storage, interest, and insurance costs accumulate over time

Supply factors for Corn:Acreage under cultivation: The amount of farmland in which corn is cultivated effects supplyWeather & climatic conditions: Government policy: Government policies, like agricultural subsidies etc. effects supplyYeild: Corn yields increased from 74.1 bushels per acre in 1965 to 132.2 bushels per acre in 2007Demand factors for Corn:Food useSeed useIndustrial use

Ethanol TimelineEthanol became a popular fuel during world war II.The lead phase out period in the early 80s.Series of laws passed in early 80s.In 1997, US auto manufactures began mass production of flex-fueled vehicles, which could run on gasoline and on blends.The Environmental Protection Agency recommended that MTBE use should be phased out nation-wide.The RFS has been increased to require13.2 billion gallons by 2012 and 15 billion gallons by 2015 from corn based ethanol aloneand to a total of 36 billion gallons by 2022 coming from all renewable fuelsLow interest loans tax benefits first tariff imposed on foreign produced ethanol6

In 2012 approx. 14 billion gallons of ethanol was produced.Ethanol accounted for approx. 25% of all US motor fuel.Refinery capacity utilization1 bushel = pounds.

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Ethanol production requires just2/3 of each bushel of corn. The remaining 1/3 is fed to livestock in the form of distillers grains.Greenhouse gas reductions between 30 and 49 percent compared to gasoline.

The term corn crushPhysical process - the process of converting corn into the byproducts of ethanol and distillers dried grains (DDGs).Calculation process - a dollar value quoted as the difference between the combined sales values of the products (ethanol and DDGs) and the cost of corn.

Calculation of the spreadCorn is traded in dollars and cents per bushelEthanol in dollars per gallonDDGs in dollars per short ton

Differences in units of the above requires conversion of all into (cents per bushel) unitCalculation of the spreadWhen a bushel of corn weighing 56 pounds is processed for ethanol, the conventional result is 2.8 gallons of ethanol and 17 pounds of DDGs.Therefore, to convert prices into cents per bushel, we need to do the following:-Conversion of prices into cents per bushelCorn: No conversions requiredEthanol: 2.8 gallons of Ethanol = 2.8 x price of ethanolDDGs: 17 lbs/2,000 lbs per short ton = .0085 x price of DDGs

ExampleCalculate the corn crush spread based on the following values:December Corn futures: $3.59 per bushel (5,000 bushels)December Ethanol futures: $1.76 per gallon (29,000 gallons)December DDG futures: $105.00 per short ton (100 short tons)CalculationStep 1 Convert Prices into dollars per bushel:

Ethanol: $1.76 x 2.8 = $4.928 per bushelDDGs: $105 x .0085 = $0.893 per bushel

Step 2 Subtract the cost of corn from the combined sales value of the products:

Ethanol + DDGs ($4.928 + $0.893): $5.821 Corn $3.590Corn Crush $2.231Corn Crush Spread

Trading Strategy In The Crush Spread

Thank youName Roll No.Supriya Gunthey 102Sangini Zaveri 135Vilojan Daniel 98Aruttam Biswas 92Rishabh Bhandari 89Aditya Doshi 100Rushabh Shah 126