Here's an interesting story, which speaks volumes about the psychological dynamic of the markets. On Friday the United States Department of Agriculture (USDA) will report on end-of-season inventories, often called 'ending stocks.' Traders are getting word the report may show inventories are lower-than-usual. Against that backdrop, as a trader you certainly don't want to take a short position. So what to do? You buy, of course.

Monday's buying drove corn prices to a record high of $7.6025 per bushel, up 24.25 cents, as reported in the Wall Street Journal. Country Hedging, a brokerage firm, said: "Federal forecasters could drop the projection to less than 500 million bushels from last month's 675 million. This is a 15 year low."

All in all, Archer Daniels Midland (ADM) posted a stellar second-quarter earnings report. Net income came to $732 million or $1.14 per share. This compares to $567 million, or $0.88 per share in the same period a year ago. The Street was looking for $0.78 per share.

Revenues rose by 32% to $20.93 billion. The consensus estimate called for $17.5 billion.

Sequestered within the pages of auto industry news, came notice of a recent EPA approval that could cause unexpected repercussions across a wide range of investor and consumer interests. The EPA has just given its approval for a 5% increase in the amount of ethanol allowable in today's motor fuels. While the petroleum industry has not yet given indication whether or not it shall make the new fuel blend available to consumers, various business sectors and government entities are quickly aligning themselves either pro or con on the issue. One thing is almost certain, corn futures just became more volatile.

The auto industry is largely against the increase in ethanol concentrations, citing the fact that a 15% ethanol mixture cannot be safely and efficiently burned in vehicles manufactured before 2007. Consumers who mistakenly pumped E15 gasoline into those older vehicles would run the risk of damaging their car engines and defeating the emission equipment and mileage standards of their vehicles.

Corn futures continued their spectacular rally. In the past four days, December corn futures have risen from $4.88 to $5.44 per bushel (each penny equals $50).

Even though we have a good corn crop this year, the situation next year will be much worse. The U.S. government said that leftover supplies will fall to a 15-year low, as reported in the Financial Times.

From 2007 to 2008, grain prices shot up to all-time highs when talk of a worldwide food crisis occurred. Now again, the same dynamics are beginning to formulate.

Agricultural issue Archer Daniels Midland Company (NYSE: ADM) is sharply lower in today's trading after falling short of Wall Street's earnings expectations. The company confessed to a 98% slide in third-quarter net income, thanks to hefty investment losses and a weak pricing environment.

ADM reported a profit of $8 million, or 1 penny per share, compared to its year-ago results of $517 million, or 80 cents per share. Investment losses for the period totaled 36 cents per share. Revenue for the quarter tumbled 21% to $14.8 billion, impacted by strength in the U.S. dollar and softer commodity prices. As a result, gross margin contracted from 6.2% to 4.4%.

EWG (Environmental Working Group) found that the largest chunk of Federal subsidies for renewable energy has been for ethanol. The corn based ethanol industry received $3 billion in Federal tax credits in 2007, more than four times the $690 million in tax credits for all other forms of renewable energy including solar, wind and geothermal.

Some critics argue that Federal subsidies for corn based ethanol have not produced the results needed to solve our current energy crisis and dependency on foreign oil.

One important factor in ethanol production is water consumption. One state, Minnesota which keeps records on water consumption reports that on average it takes 4.5 gallons of water to produce one gallon of ethanol. Not included in this report is the cost in water usage needed to irrigate the corn to produce the feedstock.

Enter the environmentalists who argue that ethanol production is polluting our nation's water, eroding our soil, plowing up precious habitat and worst of all most likely contributing to global warming. There is growing concern that ethanol will not solve our growing energy problem and it was previously intended.

Should we continue with our current subsidies for ethanol?

Daryll Ray, University of Tennessee professor and director of the college's Agricultural Policy Analysis Center, spoke to a group of Kansas farmers to present his views on world agriculture production.

Ray cautioned farmers not to look to agriculture as a continuous source of economic prosperity. He cited the current economic crisis and warned that future corn prices, instead of near $4.00 to $5.00 per bushel, may go in the opposite direction. He noted that Brazil and Ukraine are expanding their agricultural production. For years, farmers looked to China as a big export market. China, however, has been a net exporter of grain since 1996. China does import, but they export more than they import.

Secretary of Agriculture, Adrian Polansky, also spoke at the meeting and pointed out the benefits of ethanol production. He said that ethanol plants were employing upwards of 235 people in small towns in rural Kansas, Nebraska, and Iowa.

Do you expect food prices to decline this year?

This post was writtenby Minyanville contributor Ryan Krueger.

Looks like Verasun Energy Corp. (NYSE: VSE), a formerly popular ethanol stock and second largest producer, has won court permission to cancel contracts signed to purchase corn. It is now in bankruptcy. I'm also hearing about a lot of excess ethanol funded by your tax dollars being sold to other countries. That worked out well.

The mistaken policy and debates are endless, the trades are what I am chewing on instead. I think consumers of corn at lower prices are set up for some awfully tasty '09 comparisons for their bottom lines. Corn Products International, Inc. (NYSE: CPO), after Bunge Limited (NYSE: BG) backed away from its take-over, is a name I have re-entered from the long side after closing out my position just after the non-merger was announced and shares traded twice what they are now. They sweeten something you'll eat or drink in the next hour.

Longer term, however, I am even more interested in the ingredients, not the end products. But it's still early. I have been long gone from 2008 corn contracts for quite some time, but am starting to poke around out on the futures curve. On the same day this court ruling was announced abolishing artificial demand, quiet real demand emerged as Mexico was a big buyer of corn.

I'll take a few billion eaters over several million drivers any day.

The irony of it is that food prices have dropped from record highs in the summer to fairly reasonable levels, but that could put some farmers out of business. Welcome to the world of deflation.

According to The Wall Street Journal, "A slowdown in new farmland development could hinder efforts to ease the global food shortage. Earlier this year, those shortages triggered riots from Haiti to Egypt to Pakistan and raised fears of permanently higher prices for basic foodstuffs."

Everyone assumed that a recession would move food prices lower or at least keep them at current levels. Budgets that were strained by high commodities prices might gets some relief which they will need as employment and consumer prices fall.

The problems may be especially acute in the US where some farmers have been making a fortune off corn due to feed demand and ethanol. Many of those farmers decided to expand, take on more debt, and buy new equipment. The price of corn has dropped like a rock over the last five months. How are those farmers going to keep up with the debt service? In many cases, they won't.

Get ready to pay more for an ear of corns and a loaf of bread. Farm failures are sending food prices back up.

Douglas A. McIntyre is an editor at 24/7 Wall St.