Worse yet, suppose the 2014 corn crop adds 500 million bushels or more to the year-ending corn levels, $2.00 could actually be a possibility. Remember 1998-2001, the LDPs and emergency payments?
We have had a reader argue that “Corn price is now based on its energy value not just on the supply and demand of corn for feed, which has helped hold up the plateau for corn.” To that we would argue “Why didn’t the feed value of corn hold up prices in the 1998-2001 period?”
The answer is that cattle feeders captured the value of the below the cost of production of corn. They had no incentive to pay more than the market demanded and neither do non-farmer-owned ethanol plants.
This reminds us of a discussion Harwood had when he took a conservation class at Ohio State. The professor was getting the students to think about balancing the competing demands for use of dams on Ohio Rivers: flood protection and recreation.
Those wanting flood protection argue for low water levels while recreation users want higher water levels. To which Harwood said, “Why can’t you have both.”
The professor responded, “If you have maximum water levels for recreation users and heavy rainfall and a flood comes, the reservoir might as well be filled with concrete!” There is little remaining room to hold the additional water, he explained.
For the 2013 crop year, WASDE projects that 4.9 billion bushels of corn will be used for ethanol production, a level that we have generally seen since 2010. With ethanol not continuing to consume 500 million extra bushels of corn each year, the 5 billion bushel mark for ethanol production is like water in a full reservoir; it is the same as concrete and any extra corn is like additional water flowing over the top of the dam—existing stable demand provides little or no protection against a flood of additional production and lower prices.
Coming back to what could happen next year if corn production in 2014 outstrips utilization causing year-ending stocks go up by an another 500 million bushels, further depressing prices. Revenue insurance would provide very-little-to-no protection against production costs—because the level of insured revenue would be based on the percentage of a very low price. That leaves some income from LDPs and the hope for $10-$15 billion in emergency payments, especially if direct payments are taken away.
Perhaps writing a farm bill in a year of declining prices will persuade legislators to provide farmers with an adequate safety net. It would be even better if they designed the farm program based on the fundamental characteristics of crop production: the low price elasticity of supply, the low price elasticity of demand, the tendency for supply to grow faster than demand, and the fixity of resources.
Source: Daryll E. Ray and Harwood D. Schaffer, Agricultural Policy Analysis Center, University of Tennessee