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HighQuest Partners Releases White Paper on How $100 Oil Really Gave Us $6 Corn (5.7.2008)

HighQuest Partners Releases White Paper on How $100 Oil Really Gave Us $6 Corn

TOPSFIELD, MA -- MAY 7, 2008 – HighQuest Partners, a strategic advisory and management consulting firm, today issued a white paper entitled “Pricing Dynamics: How $100 Oil Really Gave Us $6 Corn” that explains how the prices of corn and vegetable oils have become linked to the price of petroleum through biofuels.  
The paper challenges the conventional wisdom about what is really driving the rise in the cost of corn. Traditional thinking is that the increased cost of corn is a result of a number of complex factors: consumption in Asia, monetary policy, financial speculation and energy as the cost drivers. The white paper contends that, while all of those factors are in play, the escalation in corn prices is, in reality, a matter of simple economics. Ethanol producers, who have pushed the demand for corn beyond the available supply, have become the price-setters, and the price they are setting is based on the price of petroleum. Markets are experiencing record $6 per bushel corn prices because the link to petroleum was initially set when oil was $25 a barrel and corn was $2.50 a bushel.  Now that oil is $100, it is no surprise that corn is $6 a bushel.

“Expanding biofuels capacity would not have resulted in $6 corn and $0.70 soybean oil without $100-plus petroleum,” said Hunt Stookey, Managing Director at HighQuest Partners.  “Petroleum is now driving corn and vegetable oil pricing, and this is the new pricing dynamic in these commodity markets. The issue is not that we expanded biofuels capacity, but that in doing so, we linked these commodities to the price of oil at a time when oil was jumping from $25 to $100-plus a barrel.”

Agricultural commodity prices are up across the board due to increased demand from food manufacturers, livestock producers and exports. Corn has risen from $2.50 a bushel to $6 in a year. While corn would clearly be much higher than $2.50 a bushel now, it would not have reached $6 without the rise in the price of oil and expanding demand from ethanol producers over the past three to four years, Stookey said.

"Demand and supply responses to remedy the price rises are limited, and would not move ethanol off the margin and break the link to petroleum prices," Stookey said.

"Recognizing and understanding this underlying pricing mechanism will allow business and policy decision makers to anticipate how these markets are likely to evolve,” the paper concludes. Further, the paper suggests that the current Renewable Fuels Standards mandates will fundamentally alter the economics of the corn and vegetable oil markets yet again.

Copies of the white paper can be downloaded from the website at
www.soyatech.com. Owned by HighQuest Partners, Soyatech assists companies in the food and agribusiness sector to assess and develop market opportunities through reports, conferences and publications.
The issues raised in this white paper will be among those discussed at the upcoming Soya & Oilseed Summit 2008, hosted by Soyatech in September. For more information about this annual thought leadership event, visit www.soyasummit.com.

About HighQuest:
HighQuest Partners (
www.highquestpartners.com) is a management consulting and strategic advisory firm that helps executive teams around the world to make better informed decisions about their strategies, investments/m&a, and governance. Since 1992, HighQuest and its subsidiary SJH & Company have completed over 500 strategic assignments for strategic players and financial investors & their portfolio companies in the global grain, oilseed, food, agribusiness, biofuels, industrial, & financial services sectors.

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