Commodity prices soar, corn main cause

By Craig W. Anderson

A variety of factors have combined to push food prices higher but perhaps the primary cause of the increase is a millennia old staple: corn.

Corn is used as feed for cattle, dairy cows, hogs, chickens and egg laying hens, and corn syrup is the third-largest ingredient in Heinz ketchup and is used in soda pop, luncheon meats, salad dressings, breads, peanut butter, oatmeal, potato chips and hundreds of other food items. Corn is even a component in non-edible items such as disposable diapers and dry cell batteries.

So, when corn prices hit a record $6 a bushel in April the food industry felt it with grocery prices rising at more than five percent in 2007, the highest since 1990, said the U.S. Department of Labor.

Farmers growing corn, wheat, soybeans and other basic commodities are enjoying the high prices but there are hidden factors, said Bruce Blodgett, San Joaquin Farm Bureau’s Executive Director. “High prices may look good but high costs are through the roof. Costs will remain but eventually prices will go down and growers will have to contend with that.”

With corn becoming expensive and Central Valley and California corn being used in areas other than feed, California continues to be a net importer of corn as it has for years.

“We’re becoming more and more dependent on food grown in other states and from foreign countries and this is troubling,” said Mr. Blodgett.

Is the U.S. government’s subsidizing of the ethanol industry which uses corn as a major ingredient, the main contributor to corn being taken from the food chain and used for ethanol production?

“That is one of the factors, but not the only one,” said UNICEF Director Ann Veneman. “The public policy of the government needs to take into account the greater demand for feed grains, exports, and the higher demand for biofuels which is increasing demand and [causing] higher prices.”

The former USDA and CDFA Secretary also said a growing global middle class demands better quality and quantity of food “This higher demand for meat creates a greater demand for feed which fuels price increases” for both feed and the resulting meat.

With the federal government mandating certain production levels and subsidizing ethanol, competition for corn has increased between food producers and energy companies.
Corn prices have created a domino effect and wheat is an example of supply and demand driven prices, according to Jeff Michael, Director of the Business Forecasting Center in the UOP Eberhardt School of Business. “Wheat prices have been driven higher due to growers shifting from wheat to corn and with one-third of the corn crop heading to ethanol production, I expect high prices to continue.”

Mr. Michael added, “The situation would be better if the government subsidies and mandates were removed, allowing the market to determine prices. As it is, the consequences always show up in the prices consumers have to pay for food.”

A February survey by the American Farm Bureau Federation found that the cost of 16 grocery items, including flour and cheddar cheese, was $45.03, up $3.42, or eight percent, from the fourth quarter of 2007.

U.S. consumers are facing these higher grocery bills – in particular for meat, pork and poultry – because livestock producers pass along the higher feed and input costs.

“Higher corn prices are going to affect meat prices,” said Elaine Kub, a grains analyst with DTN in Omaha, Neb. “If you’re feeding with $6 corn, you’ll definitely have some cost pressure.”

Additional factors driving corn prices higher include increasing global demand to feed people and livestock, a weak dollar encouraging exports and unbridled speculation.

Acreage planted to corn this year is expected to be 86 million acres, down eight percent from 2007 which was the highest amount planted since World War II, according to a USDA report. Experts say the dip in acreage is partially due to the high cost of petroleum-based fertilizers and agricultural chemicals used to grow corn in addition to farmers rotating their crops to sustain farmland.

Despite the high acreage in 2007 great demand for ethanol and overseas need as food pushed corn prices to record levels which continue today. Despite the decrease, corn acreage is expected to remain at “historically high levels as the corn price outlook remains strong due in part to the continue expansion in ethanol production,” said the USDA report.

On the other hand, farmers are predicted to plant about 18 million more acres of soybeans, raising the acreage nationwide to 74.8 million which could relieve some of the feed problems but not the high prices.

An unexpected result of the soaring prices for corn and other commodities is that farmers nationwide are considering taking their fields out of the government’s biggest conservation program which pays them not to grow crops. The Conservation Reserve Program’s annual guaranteed payments are not close to what growers could make if they were farming corn, wheat or soybeans.

Last fall, farmers took back acreage from the program equivalent to that of Rhode Island and Delaware combined.
Commodity prices could increase even more if adverse weather hits the Midwest Corn Belt, forcing farmers to delay spring planting.

“Agriculture still must deal with nature and there is always the chance that weather could cause problems,” said Mr. Blodgett.
Although the ethanol fuel industry is responsible for the burgeoning price of corn, the industry’s producers are taking a hit because the price of corn is outpacing the price of ethanol, currently about $2.50 a gallon.

When corn was cheap, ethanol production dominated the biofuel industry but with corn prices hovering around $6 per bushel, corn ethanol economics are reeling.

Nationally 147 ethanol plants have the capacity to produce 8.5 billion gallons of fuel annually, according to the Renewable Fuels Association. The ethanol industry consumed about 20 percent of 2007’s 13 billion bushel corn crop. The percentage is expected to increase to 30 percent by August 31, 2009.

If, that is, the industry can afford to buy the corn to make the ethanol. A new ethanol plant hasn’t broken ground over the last couple of quarters, said Ron Oster, an analyst for Broadpoint Captal. “Although producers can have positive gross margins with ethanol at $2.50 a gallon and corn at $6 a bushels, that doesn’t mean companies are profitable.”
Mr. Oster added, “Bottom line earnings are near break-even or modestly below break-even.”

Some ethanol companies have the wherewithal to eke out a “positive return in this kind of environment, but there will be others who suffer at the hands of $6 corn,” noted Soleil Securities analyst Ian Horowitz.

In this case it seems corn doesn’t have leaves, it has tentacles extending into the very fabric of the economy, affecting agriculture, consumers and food and ethanol producers.