Betting the Farm on Corn Ethanol

by Val Germann

It’s late March, the time when the USDA announces the planting intentions of the nation’s millions of farmers. To no one’s surprise corn, still at selling at historically high prices, is the runaway winner for the 2007 growing season. More corn will be planted this spring than in any year since 1944, all but guaranteeing a record crop.

This has soothed the corn futures market but spread turmoil elsewhere in the farm patch because more corn acerage means less plantings of other crops, like soybeans and rice.

Yes, indeed, corn and corn ethanol are leading a revolution in American agriculture and linking the U.S. food and energy sectors together in a totally new way. Corn ethanol production is skyrocketing in the U.S. and a year from now capacity will have doubled from 2003, to six billion gallons per year, absorbing about one-fourth of the total corn crop. But is this a good thing? Will it help U.S. farmers in the long run?

An article on REUTERS today provides some interesting details on the U.S. agricultural situation and how corn and ethanol are changing things. First, with normal weather, the USDA estimates an all-time record corn crop, up about 5 percent from the 2004 bin-buster. This has knocked the top off corn futures prices, down at least a quarter from their $4.00 highs.

But the USDA also reports sharply lower plantings of soybeans, rice and cotton, shifting the price increases from corn into those markets. This is so because all agricultural markets are tight right now and dozens of nations around the world depend on our exports.

More U.S. corn going for ethanol here at home means less to export unless total quantity increases. But prices must go up, somewhere, if more corn is planted, because U.S. farmland has been fully utilized for decades. There is no free lunch.

So, how will this big bet on corn work out? It looks great right now and if farmers can sell a huge crop at high prices they will make out like bandits this year. But if something happens to lower the corn harvest, such as bad weather or a corn blight return, the U.S. food industry could find itself in a vicious bidding war for corn with farmer-owned ethanol plants, driving prices through the roof. This in turn would force almost all food prices significantly higher, putting more pressure on already strapped U.S. consumers.

Under this scenario the outcome for U.S. farmers would not be so rosy, in part because of what would quickly be perceived as a conflict of interest between their ethanol operation and feeding the nation. Add to this the foreign policy implications of reduced food exports to our allies and you have some ugly possibilities.

For instance, enraged U.S. consumers may frighten politicians into doing something dramatic, like changing the subsidy situation vis-a-vis ethanol, knocking the props out from underneath the entire market. That would inflict massive losses on U.S. farmers, driving many to bankruptcy, no doubt.

So, that is one BIG bet that American farmers have placed on corn. In fact, it’s nearly an “all or nothing” bet, one that probably should not be placed in a sector as important as food. Let’s all hope the worst doesn’t happen.

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About Val

I am a long-time teacher of science and astronomy with a strong interest in resource conservation and the environment.
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