Corn Futures Behaving as Expected

Last May, in The Mythical Ethanol Threat, I discussed the massive overbuilding that was going on in the ethanol sector. I knew that it would squeeze margins, but that would also put the pressure on politicians to increase the mandates (which they have now done). In that essay, I wrote: “Note to self: Corn futures to double again by 2009.” I wasn’t actually joking, and they are well on their way:

Corn Soars to Record as Demand for Feed, Fuel May Exceed Output

Jan. 14 (Bloomberg) — Corn rose to the highest ever in Chicago, gaining the maximum permitted by the exchange, on speculation that global demand for feed and biofuel will exceed production for the seventh time in the past eight years.

World inventories of corn will fall to the lowest since 1984 on Sept. 30, the U.S. Department of Agriculture said Jan. 11. Inventories in the U.S., the world’s largest producer and exporter, will be 20 percent smaller than forecast last month, the USDA said. Prices have jumped 49 percent in the past five months, even after last year’s record harvest.

“The decline in supplies was a shock to people that have to use these commodities,” said Jeff Beal a consultant for Strategic Marketing Services Inc. in Rockford, Illinois.

What planet do you inhabit, Jeff Beal? This should have been a surprise to nobody. It has been entirely predictable.

Corn futures for March delivery rose 20 cents, or 4 percent, to $5.15 a bushel at 10:23 a.m. on the Chicago Board of Trade, exceeding the record for a most-active contract of $5.135 reached in May 1996. The highest price for any corn contract was $5.545 for the July contract in 1996.

Corn rallied 17 percent last year after surging a record 81 percent in 2006, on increased demand to produce ethanol and feed livestock and poultry.

It also rose 10% in the past week. It won’t be long before even the most die-hard corn ethanol supporters have to admit that corn prices are driving up food costs. Right now, they seem to think that food prices are magically immune from escalating corn prices, and the real reason is everything but ethanol. I suspect when they can no longer hide from reality, the argument will be “Don’t farmers deserve to make a decent living?”

This is a crime against humanity. People are going to starve and die. Our politicians are idiots, and this is going to end badly. But hey, it gets them some votes in Iowa, doesn’t it?

28 thoughts on “Corn Futures Behaving as Expected”

  1. I said this last year: the corn price increase was inevitable regardless of ethanol. Corn was $3/bu in 1973 prior to 30 years of fertilizer/improved farming methods/subsidies creating a surplus in feed grains. The inflation adjusted price for corn based on the 1973 price is closer to $20/bu than $6/bu.

    Feed grains and food prices are going to increase substantially as “cheap” diesel and fertilizer become a thing of the past.

  2. Hi Robert. I’m not sure the corn price will have such a massive impact in the developing world – remember the dollar is weak. At the moment there’s quite high export demand, even at current (nominal) prices. For countries with a currency peg it could be difficult though.

  3. This is a crime against humanity. People are going to starve and die. Our politicians are idiots, and this is going to end badly. But hey, it gets them some votes in Iowa, doesn’t it?

    Cry me a river of petroleum.

  4. I think the decline in supplies was a shock, in part, because more corn is being used to feed cattle than expected. That is a bit of a shock because the price of corn is so high. Just like gas at $2.75 a gallon doesn’t do much to stop people from driving, corn at $4 a bushel doesn’t stop people from buying their beef. Also, this year’s corn harvest wasn’t quite as big as originally reported for a variety of reasons including drought in the southeast. I suspect that is what Beal was referring to, not the multi-year trend that I think you’re referring to.

    Wouldn’t it be interesting to know what the status of ethanol would be if Iowa weren’t the first state to hold a caucus?

  5. Right now, they seem to think that food prices are magically immune from escalating food prices

    I think you meant immune from escalating corn prices.

    This is a crime against humanity. People are going to starve and die. Our politicians are idiots, and this is going to end badly.

    The word is getting out, not only in blogs, but even financial commentators understand the link between our inflation problems (as represented by rising food prices) and ethanol production. It’s only a matter of time before it’s mainstream. I expect the next president to roll back this idiotic policy.

  6. I expect the next president to roll back this idiotic policy.

    Time to re-read the Constitution. The powers of the President are quite limited. Congress passed a law subsidizing corn-based ethanol; Congress passed a law mandating increased use of ethanol fuel.

    Only Congress can reverse those actions.

  7. I haven’t jumped into the data, but are all food prices rising, or just the staples (and the millions of other processed foods) that are derived from corn?

    Energy & fertilizer cost escalations are one thing, but if milk, beef and poultry are taking a triple hit due to ethanol, could a case be made for a reexamination of localized agriculture based on a more diverse (and healthier) diet? Maybe I’ve been reading too much Michael Pollan.

  8. “This is a crime against humanity. People are going to starve and die.”

    This kind of emotional rhetoric without any evidence is not very persuasive and reduces your credibility.

  9. Only Congress can reverse those actions.

    Congress certainly bears some responsibility for the disaster but it takes two to tango. To a large extent they are following the lead of the president. But you’re right, I should have said that I expect the next president to send congress a revamped energy policy that reverses the expanded ethanol program, and I expect the new congress to go along with it.

  10. This kind of emotional rhetoric without any evidence is not very persuasive and reduces your credibility.
    No, it does not. It’s a logical conclusion based on the facts. You know, those inconvinient things the pro-ethanol crowd (and its anonymous supporters) have no grasp of.

  11. Biofuels demands eating into US corn stockpiles, New Scientist, May 2007
    The surging biofuel industry will use 27% of this year’s American corn crop, challenging farmers’ ability to meet food demands, the US government says.

    Hidden costs of corn-based ethanol, CSM, May 2007
    Thus, it is no surprise that the price of corn has doubled in the past year – from $2 to $4 a bushel. We are already seeing upward pressure on food prices as the demand for ethanol boosts the demand for corn. Until the recent ethanol boom, more than 60 percent of the annual US corn harvest was fed domestically to cattle, hogs, and chickens or used in food or beverages. Thousands of food items contain corn or corn byproducts. In Mexico, where corn is a staple food, the price of tortillas has skyrocketed because US corn has been diverted to ethanol production.

    Any sort of shock to corn yields, such as drought, unseasonably hot weather, pests, or disease could send food prices into the stratosphere. Such concerns are more than theoretical. In 1970, an outbreak of a fungus destroyed 15 percent of the US corn crop.

    Biofuels warnings continue, Climate Feedback
    A UN report, released last Monday concluded that, despite offering considerable benefits such as clean energy for millions and the creation of wealth and jobs in poorer countries, biofuel production also has the ability to cause real destruction.

    The report warned that increasing production of liquid biofuels, such as ethanol and biodiesel, could increase the price of agricultural commodities with negative economic and social impacts, especially for the world’s poor who spend a large proportion of income on food. It also raised the issue that, where forests are cleared to make way for energy crops, GHG emissions may actually be higher overall from biofuels than from fossil fuels.

  12. Feed grains and food prices are going to increase substantially as “cheap” diesel and fertilizer become a thing of the past.
    I am not so sure. People are pretty resourceful, as this story proves. High diesel prices will force increased efficiency. High fertilizer prices will help us recycle nutrients that currently go to waste.

    How is the corn price of 1973 relevant to this debate? Was that before we got government interference?

  13. How is the corn price of 1973 relevant to this debate? Was that before we got government interference?

    It was Nixon’s secretary of agriculture (can’t remember his name offhand) who initiated the policies that led to high-fructose corn syrup being incorporated into darn near every processed/packaged foods today.

    (US farm subsidies in general, of course, predate that by ~40 years, but that the starting point for corn to take on the ubiquity it has in the average USian’s diet today.)

  14. As I’ve said to my friends and family. “This could be the great thinning of America.” But no one listens. The glorified, tax burdened, politician poor souls middle class will still drive the Hummers and off road monsters. I hope they don’t get lost. J.C. Sr.

  15. We have several corn states. They like ethanol. Corn farmers, after years of barely breaking even on corn, are raking it in.
    Corn-based ethanol is probably a bad idea. But, given political realities, the way to go may be to try to make it work (as in if E3’s plant would have worked), and start switching to cellulosics and PHEVs.
    Sometimes, you have to go to bed with a fatso, in order to get laid.

  16. Cry me a river of petroleum.

    Just so we are on the same page here: We are talking about the same petroleum that enabled the green revolution, and thus the lives of most of us living today? What I am talking about is pricing a basic necessity out of range for a large portion of the population, and driving up food prices everywhere. After all, we don’t have to speculate on whether America’s corn exports are going down, or how that will impact 3rd world countries. We know how it will impact them.

  17. Corn was $3/bu in 1973 prior to 30 years of fertilizer/improved farming methods/subsidies creating a surplus in feed grains. The inflation adjusted price for corn based on the 1973 price is closer to $20/bu than $6/bu.

    But how many more bushels per acre are they getting now than in 1973? That’s what people overlook when they make these inflation claims. Yields are more than double than they were in 1973.

  18. the grain/ag lobby outmuscles iowa primary significantly. remember that most of the farm/ag owners live in high rises, not clapboard two story houses in rural america.

    remember who sold the “food pyramid” to american consumers for years–high consumption of grains/cereals. “eat your sugar coated cereal, jimmy”

    ethanol is the latest version of the
    “food pyramid” foisted on the public by BIG GRAIN.

    wheaties, breakfast of champions== bankrolls for big grain/ag.

    fran

  19. I haven’t jumped into the data, but are all food prices rising, or just the staples (and the millions of other processed foods) that are derived from corn?

    It is somewhat more complex than that. When corn prices are high, farmers will plant more acres in corn, sometimes at the expense of other crops (soybeans, for instance). This causes a shortage of that crop, and drives those prices up as well. Likewise, ranchers may choose to feed their cattle something other than corn due to high prices, increasing the demand for other feedstocks, and therefore driving up their prices.

    RR

  20. Vinod has another gristmill piece up

    And I can’t help but note that his argument doesn’t begin until 2017, when a wonderful new technology is going to be much better than today’s hybrids. Thus, the cellulosic ethanol “pragmatists” win out over the hybrid “environmentalists.”

    I see that people are taking him on, though. Good for them.

    RR

  21. At that corn price, that means that feedstock costs for an ethanol plant is at least $1.83 per gallon produced. (assuming 2.8 gallons per bushel).

    I cannot find recent data, but in 2002, according to a USDA survey:

    “Net feedstock costs for the
    surveyed plants ranged from 39 to 68 cents per gallon in 2002. For cash operating expenses, the average energy expenditure was 17.29 cents per gallon. Labor costs ranged from 3 to 11 cents per gallon, maintenance costs
    from 1 to 7 cents, and administrative costs from 1 to 18 cents.”

    OF course, energy has gone up as well. And then there is that subsidy. How much money is left for profit?

  22. How much money is left for profit?

    Margins are going to remain tight. Either prices are going to have to go up sharply – which will be difficult if ethanol producers keep overproducing the mandate – or ethanol margins are going to be nonexistant. I can’t see any circumstances under which corn prices will ease significantly.

  23. How is the corn price of 1973 relevant to this debate? Was that before we got government interference?

    RR answers this question with his question:

    But how many more bushels per acre are they getting now than in 1973? That’s what people overlook when they make these inflation claims. Yields are more than double than they were in 1973.

    Corn is a commodity produced and sold by relatively independent producers and because of the quantity produced and the ability for livestock feedlots to substitute alternate feed grains, it sets the demand and therefore the other feed grain prices (barley, oats, feed wheat, etc.) If there are strong prices for easy to grow feed grains, less acres of oilseeds, pulse and specialty crops are grown (because the input costs and risks are higher than feed grains).

    The “green” revolution RR mentioned is the increased use of petroleum based fertilizer and farm equipment which really took hold in the early 1970’s and North American yields started increasing dramatically. The over-production and dumping of feed corn onto the market has held the feed grain price stagnant for 30+ years. I completely agree that US ethanol production has used up the corn surplus and grain prices are rising. My point is that US ethanol production has just sped up the adjustment and it had to happen eventually. “Cheap” petroleum and technology has allowed the increase in production while lessening the farm labor requirement. IMO that is not sustainable in the long term due to petroleum and fertilizer production capacities. US corn ethanol has used up surplus capacity and caused an increase in the commodity price, but it’s far from the only thing causing an increase in grain prices.

    From today’s Regina Leader-Post (local paper):
    ———
    He found that urea fertilizer (46-0-0) that was $410 a tonne in January of last year is now $620 a tonne. Anhydrous ammonia (82-0-0), another major nitrogen fertilizer had increased from $650 to $880 a tonne. The biggest increase was on phosphate fertilizer which went from $385 a tonne last year to $650.

    On the subject of nitrogen fertilizer, producers often ask why it’s priced so high when natural gas prices haven’t risen in tandem. The price of natural gas is a major input cost for manufacturing nitrogen fertilizer, but fertilizer is its own market. It goes up and down with supply and demand.
    ———

    I think RR is right, ethanol sparked an increase in North American grain prices. He is stretching reality thinking that it’s reversible or that it wasn’t going to happen anyway.

  24. rohar1,

    Given your arguments about the rising costs of inputs such as fertilizer, it then seems that ethanol is the culprit for those as well. The push to add corn acres, which rely heavily on inputs, has strained the input supply channels and driven up the price of these.

  25. Rohar,
    Today’s wastewater treatment plants basically converts ammonia to nitrogen (go figure) and often converts phosphate to sludge that typically goes to a landfill. Anybody see the opportunity here?

    However, for the opportunity to be realized the price of fossil-based fertilizer needs to increases. Once we make the switch, the price of fertilizer may come down again.

    There is no underlying principle that dictates that future fertilizer prices will remain high.

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