January 21, 2007

Unintended consequences -- the price of corn

The US Government is subsidizing the production of ethanol from corn and this is causing a spike in the prices. Two articles show some of the unintended consequences: High price of corn affecting diary operations:
Walloped by high corn prices
Energy from corn a must to maintain milk production

Dairy farmers are staggering under significantly higher corn prices and wondering how they're going to adjust to the sea change fueled by ever-increasing demand for corn for ethanol production.

Elma, Wash., dairy farmer Jay Gordon, executive director of the Washington State Dairy Federation, said dairy farmers have just started to feel the punch of the higher prices, primarily because their corn contracts have only recently begun elapsing.

Industry experts across the nation warn that this ravenous appetite for corn is not a passing trend, but rather a permanent fixture in the industry as food acreage is converted into fuel acreage.

During a recent national potato conference, John Petty of Wisconsin Agri-Services predicted that corn could stay in the range of $4 to $4.50 or even higher this year.

Of course, most dairy farmers knew corn prices would go up based on the number of ethanol plants in operation and under construction.

"But I don't think any of us expected this to happen so fast," Gordon said. "I'm hearing from a lot of producers that their corn costs are rising by 30 percent. We're all struggling with this."
The price of corn causing a lower demand for beef cattle:
Corn demand depresses cattle prices
More new ethanol plants on the horizon

The rising demand for corn is driving beef cattle prices down.

That's what Lyle Holmgren, University of Utah extension specialist, told beef producers at the recent University of Idaho Beef School in Chubbuck.

"The increased demand for corn in making ethanol is impacting prices significantly," he said. "Last year at this time, corn was selling for about $5 per hundredweight. This year it's at least $7 per hundredweight. Corn producers are loving every minute of it, but it's not so good for the cattle folks."

The reason for the increased demand is that the 110 ethanol plants in this country are producing 5.3 billion gallons of ethanol. The majority of the plants are in the Midwest.

"There are another 81 plants planned or under construction right now," Holmgren said. "With the planned expansions, that capacity will double. That's how fast this is moving. The bottom line is we can expect corn prices to remain strong and to impact anyone feeding corn."

Holmgren said he expects many more acres to go into corn in 2007. However, the increased demand for corn will probably outstrip the increased production.

Feedlots are already paying lower prices for 400- to 500-pound feeder steers because it will cost more to feed them up to sale weight.

"Prices in Utah were $1.49 per pound in early 2006," Holmgren said. "Prices now are at about $1.15. Prices for finished cattle are down, too."

The price was $93.50 per hundredweight for finished steers a few months ago. The latest price is about $84.50 per hundredweight.

This is coming at a time when many producers were rebuilding their herds because of recent strong beef prices.
But of course, with every push, there is an equal and opposite push-back:
Coalition to fight biofuel subsidies
Groups include oil, meat, dairy, nutrition advocates

Oil companies, meat and dairy groups and nutrition advocates are likely to form a coalition to oppose higher renewable-fuel mandates and tax breaks for alternative energy in the farm bill, said Charles Stenholm, a lobbyist and former House Agriculture Committee member.

Stenholm said the coalition would support research, particularly on cellulosic ethanol, but in other aspects of alternative energy urge Congress to "be careful about the way the government subsidizes it" and "let the market be the determinant as much as is humanly possible."

Stenholm, who is a senior government affairs adviser at the Olsson, Frank and Weeda law firm, said he has been hired by the American Petroleum Institute to protect its interests in the renewable-energy debate and that his clients also include the International Dairy Foods Association, the National Pork Producers Council and the Livestock Marketing Association.

Oil companies have long argued that government intervention favorable to renewable fuels is unfair. Stenholm said meat and dairy groups are concerned that increased use of corn for ethanol is leading to higher feed prices while nutrition advocates are concerned that food prices may rise, making it harder for poor people to afford food. As a veteran of farm bill debates in Congress, Stenholm said, "Until you get the nutrition community behind your overall (bill), you can't pass it."

Agriculture Department Chief Economist Keith Collins said at a Farm Bureau session Sunday that the use of ethanol has so far not increased food costs because producers and processors have made their decisions based on past years' supply and demand, but that the demand for corn for ethanol could increase food costs in future years.
Posted by DaveH at January 21, 2007 1:17 PM | TrackBack
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