Shrinking Corn Crops, Rising Ethanol Production Make for Volatile Prices

Shrinking Corn Crops, Rising Ethanol Production Make for Volatile PricesPeople who monitor agricultural commodities are calling last week's government report on corn -- the nation's largest crop -- a game-changer. According to the Department of Agriculture, American corn production for October is forecast at 12.7 billion bushels, 4% lower than the September forecast and down 3% from 2009's record production of 13.1 billion bushels. Corn prices jumped following the news.

There are apparently a variety of factors in play here. Bad summer weather at home reduced U.S. corn production. Meanwhile, a severe heat wave and drought in Russia, one of the world's largest exporters of wheat, prompted Moscow to issue a temporary ban on grain exports. That ban, in turn, has led more foreign markets to purchase U.S. corn for livestock feed. About 20% of the U.S. corn crop is already exported annually.

And then there's corn-based ethanol. Nearly a third of this year's U.S. corn crop will be converted into fuel ethanol, and that percentage is expected to rise in the near future. The Environmental Protection Agency has also announced it would allow the amount of ethanol used in gasoline blends for newer vehicles to increase in volume, from 10% to 15%.

Earlier this week, a coalition of farm, restaurant and food associations issued a joint statement warning that American consumers would end up paying at the supermarket for the EPA's move. The E15 ethanol blend, they say, might lead to "dramatic increases in the portion of the U.S. corn crop used to make fuel rather than food and, when fully implemented, could result in more than 40% of the nation's corn crop being diverted to ethanol production."

Tackling One Problem But Creating Another


Individual food sectors used the coalition statement to make their cases. National Meat Association CEO Barry Carpenter said the ethanol change "barely puts a band-aid on the oil dependency it is intended to alleviate, yet negatively impacts food security by further raising food and feed prices. Higher feed prices will eventually be passed on to consumers in higher meat and poultry prices. This is not a good decision for either consumers or U.S. agriculture."
Analysts for Barclays Capital are also sounding alarms, saying in a new report that while U.S. corn production may be pushing record levels, growing domestic and international demand could lead to very low reserve supplies.

"Anytime you start fiddling with a ... system too much on one side or the other, you get unintended consequences," says Dr. Bruce Hutton, dean emeritus at the University of Denver's Daniels College of Business. "While we chose corn as a solution to one problem -- gasoline -- it created other problems. So every time we as a country, or as a company, decide that you're going to think about solutions to problems without thinking about the interdependency, about the affect of that move on other systems, we get what we do."

Dr. Hutton also notes that the economic downturn is influencing the price of corn and ethanol. "If the economy's going down and people don't have enough money, then they end up not driving as much," he says, "and they don't use as much gasoline, so there's not as much need for ethanol."

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MSmailbox

Corn whiskey prices will be going up... I think that's how Joe Kennedy started his small business. Hmmm... People are a lot smarter these days, though. Why is it that all the opportunities are already gone, by the time I even hear about them? :-(

October 14 2010 at 6:09 PM Report abuse rate up rate down Reply
RAZORBACK

YES AS FAR AS CORN GOES THE PRICE INCREASE LAYS AT THE STEPS OF THE FEDERAL GOVERNMENT FOR PAYING VERY RICH FARMENRS NOT TO PLANT CROPS THIS HAS BEEN GOING ON FAR TO LONG IT ONLY HURTS THE LITTLE GUY AGAIN.I KNOW PEOPLE WHO BUY UP AS MUCH FARMLAND AS THEY CAN GET THEIR HANDS ON PUT THE LAND IN WHATS CALLED A SOIL BANK AND THEPAYMENTS PAID BY OUR GOVERNMENT YOU AND ME MAKE THE PAYMENTS ON THE FARM.THE LITTLE FARMER HASNT A CHANCE ANYMORE.THIS NEEDS TO STOP NOW!!!!!!!!!! LET THEM PLANT CROPS AND SELL THEIR GOODS OVERSEAS IT WILL HELP LOWER THE DEFICIT ARE IMBALANCE OF TRADE SOMEWHAT,QUIT PAYING PEOPLE FOR DOING NOTHING THE WORLD HUNGER PROBLEM IS REAL MAKE THEM EARN THEIR MONEY FOR A CHANGE.

October 14 2010 at 4:41 PM Report abuse +1 rate up rate down Reply
Gumby

We are ingesting too much fructose syrup coming from corn!! I rather see it be used for energy instead. Food manufacturers are making a killin on cheap corn fructose syrup or sugar used to make junk processed food!

October 14 2010 at 12:57 PM Report abuse +1 rate up rate down Reply
joethightwad

Leave the production of ethanol to those who do it best. In Brazil nearly all cars run on 100% ethanol made from sugar cane which yields, pound for pound, three times more ethanol than corn. Yet we slap a tariff on Brazilian ethanol to protect our domestic producers from efficiency they cannot match. This encourages the cultivation here of marginal land requiring more fertilizer and irrigation resulting in greater pollution via run off and depletion of major aquifers, not to mention its impact on the food chain. Cellulosic ethanol plants are years in the future. Hungar is here today.

October 14 2010 at 10:30 AM Report abuse +2 rate up rate down Reply
jettigwiz

It is true that 30% of teh corn crop is used to produce ethanol at this time. However, in reality ethanol only takes 10-15% of the corn out of the food chain. Ethanol uses only the starch in the corn. The rest is returned to the livestock food chain in a much higher nutritional value foodstock than corn. Allowing a higher blend of ethanol will open the market and lead to the building of cellulosic ethanol plants which will use residual stocks to produce a good fuel.

October 14 2010 at 9:44 AM Report abuse +2 rate up rate down Reply