Going Green

Wednesday, November 14, 2007

Food Vs Fuel Debate - Another Round

I'm about as pro-agriculture as anyone out there however, this article from National Corn Growers seems to ignore some realities.

New USDA Numbers Dispel Food And Fuel Debate; Supply Set to Outpace Demand

(11-13-07)

The National Corn Growers Association (NCGA) is encouraged by last week’s U.S. Department of Agriculture (USDA) crop production report illustrating that the United States will have enough corn to support the country’s food supply, ethanol, and export uses.

For the marketing year ending in August 2008, the corn supply is projected to reach nearly 14.5 billion bushels, while demand is expected to hit 12.6 billion bushels. USDA estimates the 2007 corn crop will reach 13.2 billion bushels, the largest crop in U.S. history and 25 percent larger than the 2006 crop.

“The USDA World Supply and Demand (WASDE) figures unmistakably dispel the food versus fuel debate,” said NCGA President Ron Litterer. “Clearly...(complete article here).

Price is determined by the point at which supply and demand meet. Corn prices are at very high levels and are projected to stay there. They are either about to fall drastically as this record crop is harvested, or there is something wrong with the numbers in this article.

Corn supply adjusts on an annual basis subject to weather conditions such as drought, and various farm programs that seek to adjust acreages planted. Overall demand is reasonably fixed based on various types of usage (except when we see radical change in demand due to the introduction of a new competing use like ethanol). Competition among those who use the crop -- such as livestock feeders, masa makers, corn chip companies, ethanol plants, sweeteners, etc. -- determines the amount of corn actually utilized each year. They essentially bid against each other for corn until the price reaches a point at which they look for substitutes.

This is the point at which we must consider that there is a difference in quantity demanded at a particular price and overall demand. The same with quantity supplied at a particular price versus the overall supply. Price is determined by the point at which the supply and demand curves (schedule of prices versus quantity) intersect. The high prices that we are seeing are the result of competitive demands bidding up the price such that the profitability of growing corn is pulling acreage from other crops in order to supply the quantity demanded. The effect is an overall lifting of commodity prices -- especially from directly competitive crop acreage such as that normally allocated to soybeans, or sweet corn for human consuption, or white corn used in chips and tortillas.

Typically we see cyclical price variations from year-to-year. This is due to the time lag in gearing up production in response to prices. High prices this year mean more corn planted in the spring. If the amount planted and ultimately harvested is excessive relative to demand, prices fall and the next year less corn is planted. This effect creates a cyclicity in pricing that is somewhat predictable from year-to-year.

This cyclical effect will be somewhat mitigated next year due to the projected startup of many new ethanol plants. These new plants are anticipated to utilize all of the projected excess supply of corn and therefore prices will remain high.

In the U.S. the amount of corn used for food isn't the issue because it is primarily used as livestock feed. However, meats are human food and the price of corn affects the cost of feeding those animals which through various market mechanisms affects the price of meat.

In other countries -- Mexico especially -- corn makes up a much larger percentage of the diet. It has a direct impact on food prices there. Much of the masa used to make tortillas is produced in the U.S. Corn prices are critical for the cost of masa.

In conclusion, I disagree with the article. High corn prices are the result, to a large extent, of increased overall demand for corn resulting from the explosion of the ethanol industry. High corn prices impact food prices due to the competition of acreage planted to corn with acreage that would have been planted to other crops and through the impact of corn prices on the cost of feeding livestock.