The U.S. is a major world food supplier, and any significant changes in its crop market impact the rest of the world.
According to the United Nations’ monthly Food Price Index released Aug. 9 this year, food prices jumped 6 percent in July, after three months of declines. Corn price was the main driver behind this increase with a 23-percent surge in July alone, topping $8 per bushel at the Chicago Board of Trade. There is no question that this sudden increase has to be attributed to the drought and prospects of a reduced corn crop. Nevertheless, a 23-percent increase in corn prices due to the drought would have a different impact in the U.S. and worldwide if corn base prices were lower. Corn prices were at $4.20 per bushel right before the drastic surge in ethanol production (figure 2) and a 23-percent price increase due to the drought would have put corn at around $5, not $7.60 as it is currently or $8 as it was this summer.
Impact on feed prices and income over feed costs
The basic law of supply and demand is the most important aspect of modern economics theory. As demand for an item increases, its price rises — it works for corn grain, corn distillers grains, ethanol, and so on.
Figure 2 on this page shows that from 2008 to 2009 ethanol production jumped from 6.94 to 10.94 billion gallons, whereas corn prices actually dropped from $4.06 to $3.55 per bushel, the reason being an exceptional corn crop with 11 more bushels per acre for the U.S. as a whole (from 153.9 to 164.7). The following two seasons — 2010 and 2011 — had more “average” corn crops with 152.80 and 147.20 bushels per acre and, as a result, corn prices jumped again to $5.18 (2010) and $6.20 (2011) per bushel.
What this shows again is that the corn-ethanol interface is in a very delicate equilibrium that once broken by increased supply (i.e. more bushels per acre) or demand (i.e. lower crop yields due to weather) immediately results in a modification of the price per bushel.
The corn/ethanol interface is extremely vulnerable as it not only depends on internal but also external factors. Market globalization has resulted in higher price volatility of dairy inputs and outputs. Dairy production needs to be economically competitive if there is going to be sustained growth and secured dairy product-based foods in the future.
At the moment, there seem to be two long-term strategy options that could be pondered. One would be to change the current U.S. dependence on corn as a feed for livestock and prioritize corn to ethanol. With our current knowledge, this approach will more than likely reduce livestock production, increase food prices, and threaten food security. The other approach is to link corn prices to animal products. In the current economic environment, dairy producers cannot afford anymore to have a set milk price and a floating feed price.
Alvaro Garcia is a professor and extension dairy specialist at South Dakota State University.