Factors impacting the price of corn in the U.S.

Tufts University Study

The U.S. ethanol industry, which in 2011 largely is based on yellow dent corn - an animal feed - is accused of causing the price of that corn to rise. Critics of corn ethanol include the corporate livestock industry and the junk food industry. The Renewable Fuels Association argues that ethanol has created a market for corn that allows it to find its true price in the marketplace and that price fluctuations in 2010 and 2011 closely track the price of oil; when oil went up, corn went up and vice versa.

With prices currently high, farmers are being portrayed as the beneficiaries of lavish farm programs and subsidies. Critics argue that in the food versus fuel? fight, choosing biofuels leads to rising retail food prices, particularly for meat and dairy products. In part, this is true, but only because animal feed, which is largely based on yellow dent corn?, is now being sold at market value and corn farmers are now actually able to sell it at prices equal to or above the price it takes to grow.Additionally, a rising middle class in India and China, which is demanding more meat in their diets, is creating a U.S. export market for corn and DDGS.

Tufts University economists Elanor Starmer and Timothy Wise argue that the meat industry is seeking a return to the unnaturally low prices following 1996 when Congress approved the Freedom to Farm Act?. When that bill passed, it produced a windfall to the livestock industry. With the elimination of most remaining supply-management measures following the bill, the 1996 Farm Bill stimulated widespread overproduction and a drop in commodity prices to levels below production costs. Farm subsidies made up only a share of the difference with grain farming families making up most of the rest with off-farm income. While family farmers’ net incomes stagnated or declined, even with subsidies included, industrial livestock operations were the recipients of low-priced feed. According to the Tufts study, between 1997 and 2005, factory farms saved an estimated $3.9 billion per year because they were able to purchase corn and soybeans – the main components of most feed mixtures – at prices below what it cost to produce the crops. This was a reduction amounting to 5%-15% of operating costs. Estimated savings to industrial hog, broiler, egg, dairy, and cattle operations totaled nearly $35 billion over the nine-year period.

With corn ethanol creating competition for livestock producers, growers are now able to obtain a market price for corn and the livestock industry is having to buy their feed - even with DDGS - at market value. As a result, profits are no longer artificially high and it has led to a shakeout among meat producers, resulting in closures and realignment of meat production capacity relative to the market price of animal feed.

Informa Economics Study

Informa Economics released a study in July 2011, entitled Analysis of Corn, Commodity, and Consumer Food Prices. The study concluded that the statistical evidence does not support a conclusion that there is a tradeoff between the use of corn for corn ethanol that automatically drives consumer food prices higher. Instead, the study found that “…there has historically been very little relationship between annual changes in corn prices and consumer food prices. The corn price would be considered a statistically insignificant variable in determining what drives the food consumer price index.”

Bruce Scherr, the CEO and Chairman of Informa Economics said when the study was released that ethanol is not the only driver influencing corn prices and that corn prices have not been the only factor driving consumer food prices. He said that a complex and interrelated set of factors contribute to corn and food prices. Further, the farm share of the retail food dollar is relatively small. Increases in other marketing component prices are what are contributing to food price increases. The study was funded by the Renewable Fuels Foundation?

External links

Tufts University Study published 3 December 2007

Informa Economics Study published July 2011