Ethanol Pushing Corn Prices Up, Stocks Down

By David L. Brown

According to the latest figures from the U.S. Dept. of Agriculture, ethanol production is taking more than a fifth of the 2006 corn crop, and with big expansion of distilleries under way that proportion is bound to dramatically increase for the 2007 and particularly the 2008 crops.

According to Associated Press food and farm writer Libby Quaid, the demand for corn has pushed prices to levels not seen in more than a decade. She writes that “the monthly crop report [for January] forecast even better prices than in December, raising the estimate 10 cents to $3 to $3.40 a bushel. Her story continues:

Robust prices have made corn more expensive for livestock feed and as food for people. But a drop-off in those uses was more than offset by growing demand from foreign markets. Exports are forecast to claim 2.25 billion bushels of corn from last year’s crop, up from last month’s forecast of 2.2 billion bushels.

Overall, the corn crop came in at 10.5 billion bushels, slightly under last month’s forecast of 10.7 billion bushels. Anticipated yields were 2.1 bushels lower per acre, and the area planted and harvested was slightly smaller than expected.

The amount of corn used for ethanol, forecast at 2.15 billion bushels, was unchanged from last month.

Nationwide, supplies of corn are expected to drop to 752 million bushels, a drop from last month’s forecast of 935 million bushels and a steep decline from last year’s supply of 1.967 billion bushels.

There are reasons for serious concern in these figures. Here are just a few:

  • First, despite the expected increase in demand from ethanol plants, farmers were unable to hit production targets, with average yields and harvested acreage both falling below expectations. This casts doubt on statements to the effect that farmers can dramatically increase production to fill the extra demand from ethanol plants.
  • Second, export demand is continuing to grow and there is no reason to believe that this trend will do anything but continue. This slow and steady growth in demand for American farm products would have provided a steady increase in farm stability and an excellent long-term opportunity. The ethanol mania is almost certain to disrupt these markets and lead to economic chaos.
  • Third, the corn supply is also dropping even faster than expected and represents “a steep decline” from last year. That “supply” is the amount of grain stocks on hand, and is all that stands between us and an empty basket. The 752 million bu. supply reported in the January crop forecast is just 38 percent of last year’s supply. Based on this year’s harvest of 10.5 billion bu., it represents just one-fourteenth of the 2006 crop, or in calendar terms, a supply equal to just 26 days of demand from all sources. Yes, we are within less than a month of running out of corn.
  • And finally, the rush to cash in on the bonanza by boosting production in 2007 will cause U.S agriculture to use more energy in the form of fuel, fertilizer, agri-chemicals, and transportation. Most of that energy will come from petroleum and natural gas. This is ironic, to say the least, since the whole idea of this ethanol investment bubble is supposed to be to reduce energy dependence.

Even more bad news, especially for Americans who buy their food, can be seen in the reported decline in demand for corn for use as livestock feed. This will shake out as tighter supplies of meat and dairy products, which will hit consumers with higher prices.

As ethanol plants continue to bid up the price of corn, the search for alternatives will affect prices all over the agricultural map. For example, wheat, rice, grain sorghum and barley prices will also rise as buyers turn from corn to other grains. Export market customers will also bid up those commodities worldwide. As farmers devote more acres in 2007 to planting corn in hopes of cashing in on the bonanza, acreage planted to soybeans and other oilseed crops can be expected to drop, causing demand to further raise prices for those products as well.

Increased production efforts will also place new demands on water resources, further depleting already strained resources and requiring even more energy to pump the precious water. Furthermore, farmers will go further into debt to buy bigger tractors and combine harvesters, install more irrigation systems, and to buy up or lease more land in hopes of striking it rich. All the earmarks of an investment bubble are in place here.

The longer range outlook for this ill-conceived investment mania is grim. If the many ethanol plants now in the construction or planning stages actually come on line, demand for corn will far outstrip the ability of farmers to meet it. Despite that, farmers are certain to put fragile acres that are ill-suited to corn production to the plow, increasing topsoil loss through water and wind erosion. There is a definite possibility for a new Dust Bowl. Meantime, export markets will be destroyed as worldwide grain prices soar beyond what most buyers can pay. Famine and food riots could result.

And the saddest part of all is that many if not all of those ethanol plants are perhaps doomed to stand idle when competition for grain stocks pushes the cost of producing ethanol above the price of petroleum-based fuels. Such an event would be followed by a crash in grain prices as plants are shut down.

Such a scenario could unwind surprisingly quickly, leaving the world’s agricultural economies in shambles and American farmers in deep trouble. Billions of investment dollars will have been lost, many of them by the farmer-producers themselves who have yielded to the temptation to invest in local ethanol ventures. There is an old rule of thumb that one should diversify one’s investment portfolio to reduce exposure to unexpected events. Farmers who count on ethanol investments to complement their farm income may be setting themselves up to participate in another round of agricultural failures and consolidation such as devastated family farming in the 1980s.

One final observation: The AP writer used the word “better” to describe higher corn prices. This reveals a distorted point of view that is completely farmer-oriented. The word “higher” would be more appropriate to describe the impact on society as a whole, and the word “worse” would apply from the point of view of most of us. Yes, words do matter, they really do.

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