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.
For more than 3 millennia, people have known that agricultural production is highly variable from year to year, while the demand for food is very stable. To solve this problem, the ancient Egyptians and Chinese implemented government-organized reserves to buy grain during periods of high production and then sell the grain when crops failed.
In the U.S., use of grain reserves was successfully implemented during the Depression and was used off and on over the next 5 decades. By 1961, corn reserves were 65 percent of annual utilization and policy makers decided they had to empty out the larder. Want to guess when Old Mother Hubbard’s cupboard was bare?
Yes, you’re right. It was the early 1970s, just when we needed the grain. By the 1977 crop year, with prices two-thirds of their recent levels, reserves were back in favor.
Once again, in the late 1980s, reserves fell out of favor and were effectively eliminated in the 1996 Farm Bill. And what happened two years later? The government lacked the ability to purchase reserves to stabilize prices—exports were supposed to do it—as a result prices plummeted. The result was an ethanol industry that developed at a much faster rate than it would have in the absence of extremely low corn prices.