CNNMoney.com
03-28-07
Corn: The inflation crop
The U.S. is set to report a jump in acreage planted as farmers feed the ethanol
machine. One byproduct: rising food prices.
By Jeff Cox, CNNMoney.com contributing writer
NEW YORK (CNNMoney.com) -- It's no secret that the rush to ethanol and other
alternative fuels has made corn the rock star of the Farm Belt.
That newfound prominence has big implications for the nation's economy,
experts say. Soaring corn prices are pushing up the tab for everything from
candy to corn flakes, moribund land values have jumped in many Midwestern
farming communities and the crop has become the lynchpin for the budding $40
billion ethanol industry.
Prices for corn have doubled during the last two years, a trend that's pushing
food prices higher.
With corn farmers now getting $4 a bushel for their crops - double the price just
two years ago - corn's become the crop of choice for farmers. And with the
government's release Friday of a key report likely to show a jump of 11 percent
or more in the amount of acreage farmers plant with corn this year, the 7,000year-old crop will remain front and center in the eyes of economists and millions
of other Americans.
Bush, automakers pitch ethanol
"It really is a bit of uncharted territory," said Christopher Hurt, an economist at
Purdue University, referring to the vast increase targeted for corn production.
"We've never seen a year where we've needed to shift so many acres into corn
because of a dramatically large increase in demand for the commodity."
Corn is the main ingredient in U.S.-made ethanol, the biofuel the Bush
administration hopes will start to wean the United States away from oil. President
Bush has set to reduce gasoline consumption 20 percent the next 10 years.
Last year some 2.1 billion bushels of corn produced ethanol at 106 plants
nationwide. That number is expected to jump to 3.5 billion bushels this year as
dozens of new plants come on line or get expanded, according to the Renewable
Fuels Association.
As corn output jumps, farmland devoted to other crops will drop. Acreage
devoted to cotton, for instance, is expected to show a 14 percent decline from
2006, according to the National Cotton Council. Soybeans, wheat, barley, oats
and alfalfa also will be displaced.
The corn phenomenon will be felt in the market in a variety of ways.
The high demand for corn, which accounted for about 10 percent of the $305
billion farm industry last year, will push food bills up faster than the overall rate of
inflation, economists say. That's because corn and corn-based sweeteners are
used in so many foods and soft drinks.
Meanwhile, farmers benefiting from higher prices for corn - and higher land
values - could also get higher prices for other crops that corn has displaced.
"I think the probability now is very large for 2007 and 2008 that price increases in
the food and beverage sectors are going to outpace the general inflation rate,"
said Hurt, who predicted food prices will rise 5 to 7 percent in each of those years
compared to the norm of about 3 percent.
"Energy has been the bigger component of inflation these past two years, while
food helped to moderate that. Now you have a scenario where food and
beverage are going to be leading inflation."
Most economists are predicting the U.S. will say farmers are planting some 88
million acres with corn this year, up from 78 million in 2006. The Department of
Agriculture is due to release its annual crop survey on Friday. March is a pivotal
month for the survey because it's when farmers announce their planting
intentions. Corn prices are expected to stabilize around $4 a bushel, up 20
percent from last year and a 100 percent spike over 2005.
But into each crop's life a little rain must fall, and too much precipitation could
spoil corn's reign as king of the crops.
A wet spring would delay corn planting. A shorter growing season would cut
output and could cause nasty swings in prices. A spike in prices would hurt the
ethanol industry, which is depending on stable costs.
A study at Iowa State University several months ago pegged at $4.05 a bushel
the maximum price that ethanol plants could pay and remain profitable. Any rise
beyond that would greatly reduce the incentives to build new plants and make
ethanol, sending the corn industry and the U.S. energy policy into a dual tailspin.
Surging corn prices tighten ethanol financing
Mark Schultz, an analyst at Northstar Commodity Investment Co. in Minneapolis,
believes that excessive rainfall is the only thing that can slow down the corn
market. "The demand continues to get stronger for ethanol and that's going to
continue on. We don't see anything slowing that down at the present time,"
Schultz said.
But he's also watching other effects of corn's growth, and notes that the increase
in corn prices has meant less feed for livestock. Cattle weights have dropped 10
to 20 pounds during the past year, he said. Experts disagree on whether the
falling cattle weights will lead to higher beef prices.
William Plummer, a commodities trading adviser at Wextrust Capital based in
Chicago, said he is bullish long-term on corn prices.
"I don't think we can ramp up production of agricultural products fast enough to
compensate for the growth of ethanol facilities in the U.S.," he said.
"This price level that we're looking at right now is going to be on the low side or
certainly the medium-low side of where we're going to be. We're not going to see
corn under three bucks unless there's some sort of catastrophe."