Driving through the corn forest of western Ohio, I am often struck by how our farmers continue to thrive despite years of undependable weather and erratic markets.
In light of the grain price spike of 2008 and the "ethanol vs. food" controversy, I wondered how such farmers viewed their market and prospects for the future. I was also curious about the impact of ethanol on their business.
Thanks to the Ohio Farm Bureau, I had the opportunity to discuss the corn market with a farmer and expert, Brent Porteus, past president of the Ohio Corn Growers Association. Porteus's family has been farming in east central Ohio for over a century.
What has been the impact of ethanol on Ohio's corn farmers?
"The impact of ethanol is not as great as many people believe. It's still only a part of the market -- last year, three billion bushels. Sixty percent of our corn production is used to feed livestock, while over two billion bushes went to export last year, up 6 percent. Last summer, China was buying commodities, since they were a bargain due to the weak dollar. The spike in grain prices occurred when oil prices went up and the stock market declined, and money looking for a safe haven flowed into commodities. This 'perfect storm' was what drove prices up steeply for a couple of months. It wasn't a corn problem; it was an energy problem."
Porteus told me that no intelligent farmer would plant with the expectation of a repeat of this unprecedented circumstance. He has stuck to his business plan and his usual crop rotation for 2009.
How much does an Ohio farmer need to get for a bushel of corn to finish in the black?
Three to four dollars, Porteus estimated, depending on his business operations, weather, and yield levels. (So far this year, corn has stayed above $4 a bushel.) He cautioned, though, that "one energy-related problem farmers are facing is the cost of fertilizers and other supplies. Three years ago potash was selling for under $200 a ton; now it sells for $900 a ton."
Another fertilizer used for corn is nitrogen, in the form of anhydrous ammonia, which is produced from natural gas. We all know what has happened to the price of natural gas. Facing an uncertain market, Porteus said many farmers could opt to plant soybeans this year. The soybean, a legume, doesn't require the additional nitrogen.
How can farmers deal with this price volatility?
Porteus finds it ironic that, at a time when the government is making capital investments in new, green technology, it is reducing grain price supports, which serve to diminish price volatility. He pointed out that low corn prices discourage planting, which diminishes supply. If farmers cut back on planting corn and the market were to experience strong foreign demand, or oil prices were to spike again, thus increasing the demand for ethanol, the resultant call on corn could result in higher livestock feed costs. This would raise the cost of meat and other corn-related food products. It would also move us further from energy independence.
The price volatility also hurts the development of new ethanol production plants, predominantly found in the grain-producing states. States like Iowa have placed great hope on the job-creation potential of this industry. One acre of corn yields about 450 gallons of ethanol, and 30 percent of what is left over is still usable as feed.
Nine billion gallons of ethanol were produced in 2008, but capacity still outstripped demand. The federal Renewal Fuels Standards call for 11.1 billion gallons of ethanol to be incorporated in our fuel supply in 2009. If demand remains slack, the percent of ethanol in our gasoline will have to increase.
However, a longstanding government "blend wall" caps the amount of ethanol that can be incorporated into gasoline at 10 percent. The industry is lobbying to have this number raised, claiming that a 20-25 percent blend would not diminish a vehicle's performance. While the government actively promotes ethanol with tax credits, suppliers of petroleum, natural gas, coal and nuclear power are also vying to protect and grow their share of the energy market.
What about the 'ethanol vs. food' controversy?
Porteus points to the dramatic increase in our nation's yield per acre over the past 30 years. In 1978, the U.S. corn harvest was about 6.3 billion bushels; in 2008, 12.1 billion. He believes that, with new planting technology and improvements in the corn stock, farmers will be able to increase their yields to serve the ethanol industry without driving up food prices. Also, as the USDA points out, only 19 percent of our food cost comes from the cost of grains and seed oils.
If we do see an effect of corn prices on our food, it will most likely come in meat and dairy products. The increase in grain prices along with slack demand has already resulted in hard times, especially for the pork industry,
After talking to Porteus, I came away more assured that ethanol production won't come at the cost of a significantly higher grocery bill, and less worried about the viability of our family farms. At least, as long as the weather holds.