23 Jan Corn prices and ethanol: Are the markets flaky – or working as they should?
Madison, Wis. – About eight percent of the weight of a box of corn flakes is corn. Less than five percent of the price of a box of corn flakes represents the cost of the corn – the rest is transportation, packaging, Super Bowl commercials, little plastic-wrapped toys for your kids, and more. Heck, the price of the box alone probably exceeds the cost of the corn inside.
That spoonful of information is offered as a bit of perspective on one of the latest controversies surrounding corn ethanol production in the United States and elsewhere. Namely: Will ethanol production increase food prices to the point that some people, especially the poor, can’t afford to eat?
The history of free markets suggests the answer is “no.” The diversion of corn to ethanol production need not hyper-inflate food prices in the United States or anywhere else, especially if the markets are allowed to work in a relatively unfettered manner. That’s not to say there won’t be market cycles; in fact, such fluctuations are to be expected. But there’s no need for policymakers or advocacy groups to push the panic button. Two news items in the last week illustrate the concern.
• The price of corn tortillas, the staple of the Mexican diet, has risen by one-third in a month. The price increases have prompted Mexico’s new president, Felipe Calderon, to abandon his free-trade principles and to compel producers to sign an agreement fixing prices for corn products. There’s disagreement over the causes of the price spike, but ethanol production in the United States is getting part of the blame – fairly or otherwise.
• A study by the federal Commodity Futures Trading Commission found the same Wall Street commodity funds that are investing heavily in energy futures are also turning to agricultural commodities, such as corn and livestock futures. That has fanned fears that food prices will be affected by speculation. Sort of like that old Eddie Murphy movie “Trading Places,” but minus the laughs.
Ethanol and corn prices
There’s no doubt rising ethanol production is contributing to rising corn prices. In farm states such as Wisconsin, however, that’s not the worst thing that could happen. Farmers who were producing a surplus of corn for less than $2 per bushel in January 2002 are fetching $4 per bushel five years later because demand is finally catching up to 30 years of oversupply.
It remains to be seen if those prices hold. In Wisconsin, corn is already the state’s largest crop, covering about one-third of the 12 million acres planted each year. Corn acreage will likely increase in 2007 as farmers try to catch the wave of higher prices – and the extra production may cause prices to stabilize.
Corn yields per acre are also increasing, thanks to better production techniques and genetically engineered seed that stands up against drought and pests and which grows in less fertile soils. Wisconsin yields that averaged about 45 bushels per acre in 1946 had tripled to about 145 per acre by 2006; it’s not uncommon for farmers to harvest 200 bushels per acre. That will also help control prices.
Then again, all that productivity may be necessary. By 2010, it is estimated U.S. ethanol plants will need 2.6 billion bushels of corn per year, or about 1.2 billion more than what was consumed in 2005. It’s projected that about one-fifth of Wisconsin’s crop land will be dedicated to growing corn for ethanol.
As production rises to meet the demand, however, we’ll hear fewer doomsday predictions about Third World people starving so that Americans can drive to the corner convenience store.
In time, corn-based ethanol will soon be supplemented by other technologies. While chemically identical to ethanol produced from corn, cellulose ethanol contains three times the net energy of corn ethanol and emits a lower net level of greenhouse gases. Cellulose ethanol can be produced from a range of biomass feedstocks, including agricultural plant wastes (corn stover and cereal straws), plant wastes from industrial processes (sawdust, paper pulp), and energy crops grown specifically for fuel production, such as switchgrass.
Let the markets work. If food prices rise sharply, people shouldn’t leap to the conclusion that ethanol production is entirely to blame. They should also remember the United States is gaining a measure of energy independence through a technology that is helping our farmers and the environment. Maybe that’s worth a few extra cents for a box of corn flakes.
Recent articles by Tom Still
• Tom Still: How a healthy tech-based economy helps others in Wisconsin
• Tom Still: High taxes and low rates of entrepreneurship – is there a relationship?
• Tom Still: Wisconsin’s high-growth economy: ’07 predictions
• Tom Still: Entrepreneurship grant will build strong foundation
• Tom Still: Flying to the moon? Take Wisconsin tech along
• Tom Still: Closing the income gap begins with education
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