Soybean meal and whole cottonseeds complete the list of most popular feeds and were fed to 90 and 38 percent of the cows in the Midwest, respectively. Taking into consideration a typical 50-pound (dry matter basis) lactating dairy cow ration used to comprise on a dry basis approximately 13 pounds of alfalfa forage, 13 pounds of corn silage, 19 pounds of corn grain, and five pounds of “other feedstuffs” to make for a nutritionally balanced diet. This shows corn and corn-derived feedstuffs constituted, on average, 64 percent of the dry weight of Midwest lactating dairy cow ration, and thus had a high economic weight on the cost of production.
Supply and demand
Modern economic theories state other factors beyond supply and demand affect price, such as government regulations, speculation, as well as modern techniques of marketing and advertising. Even acknowledging these a quick look at ethanol production and corn prices shows the noticeable relationship of supply and demand that unarguably operates in free markets (figure 1).
If there is such a tight relationship between supply and demand, why didn’t corn prices increase between 2002 and 2004? Why are the graphed lines between ethanol production and corn prices diverging between 2002 and 2004 in spite of ethanol production increasing by 60 percent? This is again explained by supply and demand. Corn harvested for grain during that period increased by five million acres and corn production in million bushels by almost 24 percent (table 2). From 2005 to 2009, ethanol production started to grow exponentially and we also had an increase in corn from roughly 11 to 13 million bushels, or 18 percent, which was reflected in corn prices around $4 per bushel. From 13 million bushels in 2009, corn production dropped to 12.4 and 12.3 million bushels in 2009 and 2010, respectively. As one would expect, corn prices per bushel were 5.2 and 6.2 for both years, respectively.
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 in 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 $4.2 per bushel right before the drastic surge in ethanol production (figure 1) and a 23-percent price increase due to the drought will put corn at around $5, not $8 as it is currently.