What is in this article?:
- The livestock industry and others that use corn as a key input are calling on Congress and the administration to modify or suspend the ethanol mandate for the 2012 corn crop.
- Corn farmers, on the other hand, are concerned that a change in the ethanol mandate may collapse prices just when they are facing a reduced crop.
- Current high prices may trigger increases in production that could result in extremely low prices in the future.
With members of Congress back home campaigning, we expect they may be getting an earful from their constituents weighing in on the state of the 2012 drought-reduced corn crop and what to do about it.
The livestock industry and others that use corn as a key input are calling on Congress and the administration to modify or suspend the ethanol mandate for the 2012 corn crop. Pressure for modifying the mandate is also coming from a hunger community that is fearful that a further rise in corn prices will trigger an increase in the number of food insecure people as it did in 2008, when more than 200 million were added worldwide to the rolls of the food insecure.
Corn farmers, on the other hand, are concerned that a change in the ethanol mandate may collapse prices just when they are facing a reduced crop. At this point, we have a better idea of the size of this year’s crop than we do about how the ethanol mandate debate is going to shake out. What we are certain about is how we got into this pickle.
There are two parts to the story and they both hinge on the same policy change. The first part has to do with sharp shifts in either the demand for or the supply of corn. The second has to do with the political economy surrounding the development of the ethanol industry. We’ll get to the policy change toward the end of this column—regular readers will not be surprised by our analysis.
The export boom of the 1970s began with a decision by policy makers in the Soviet Union to import grain rather than reduce their domestic grain demand by reducing the size of their cattle herd. While U.S. corn exports averaged 500 million bushels in the 1960s and were 506 million bushels in 1970, by 1975 they had tripled to 1.7 million bushels. Meanwhile, the price of corn doubled, putting pressure on cattle producers.
Fast forward to the drought of 2012 where the projection is for the corn yield to fall for the third year in a row to 123.4 bushels per acre, 16 percent below the 2011 yield and 25 percent below 2009. 2012 farmgate corn prices are projected to be more than double their 2009 farmgate average of $3.55.
Now to the second part of the story. Beginning in 1998 the farmgate price of corn fell below $2.00 for only the second time in the prior 25 years. And unlike 1985, it stayed there for four years. Even with the emergency payments, corn farmers were desperate. They were told that the problem was overproduction and the solution was to get involved in non-food-related demand enhancement.