Price of Corn Shoots Upward -- Ethanol Will Too!

In my 24 March 2008 post Corn for Real Food or Energy Myth?, I demonstrated how every argument for the use of corn to make ethanol was wrong. In some cases, it has long been clear that these arguments were at least dubious and more recently it has become clear that the entire policy is idiotic. On Friday, 4 April 2008, the futures price for corn to be delivered in May on the most actively traded contract hit $6 per bushel. Corn prices have risen nearly 30% already this year due to reduced stockpiles and an huge increase in demand for ethanol and livestock feed. Prices have shot up 89% in the last 18 months!

Recall from the earlier post that distillers can produce 2.7 gallons of ethanol from one bushel of corn. Presently, the cost of one gallon of ethanol is $2.50, so the 2.7 gallons produced from one bushel of corn are worth $6.75. This means that the cost of production in converting a bushel of corn into 2.7 gallons of ethanol and delivering it to the refiners, must be significantly below $0.75. This is really putting a squeeze on the ethanol refiners, so the cost of ethanol will likely have to go up. This will further increase our gasoline prices at the pump.

Just this last week, the oil industry was running ads, as the Democrats in Congress once again called them before committees to justify their profits, claiming that prices were going up due to the cost of a barrel of oil and the uncertain situation in the Middle East and in some other oil-producing countries, such as Venezuela and increased world-wide demand. This is true, but it was noteworthy that they did not complain about the effects of gasoline taxes, the requirement to use ethanol in gasoline blends, the many restrictions on their drilling for oil, and restrictions on using oil shale lands, most of which is on Federal land. Clearly, they were too afraid of the politicians who were challenging their profits. They told Congress their profits are in line with those of other industries. Democrats love to call them before Congress and grandstand that the oil companies are gouging the American public, but every rational examination of the situation always shows that they are not the guilty party. But the fools in Congress who are guilty use this means to divert attention from their hands in the cookie jar.

One of the interesting factors driving futures prices upward is that the U.S. Department of Agriculture has projected that farmers are only going to plant 86 million acres of corn this year, which is an 8% drop from last year, when the area planted in corn was the highest it has been since 1944. This is rather puzzling given the increase in corn prices! One would expect the expected high demand and the resulting high prices to drive farmers to plant more acreage in corn. Why is this not expected to happen?

One reason is that soybean prices have also gone up in the last year since much of the increased acreage planted in corn was due to a decrease in acreage planted in soybeans. Another factor is that the cost of planting corn is going up. Apparently one of the reasons for this is that corn seed is going up in cost, which caused the price of Monsanto Company stock to go up last week greatly. They are the biggest seed producer. Still another factor is one predicted in the March article, the need for crop rotation, which was too much ignored last year. When it is ignored, more fertilizer has to be used and that means more expense or there is a decrease in corn yields. When more fertilizer is used, there are more pollution run-off problems and this results in problems for farmers also. Heavy rains are forecast to continue in the Delta and southern Corn Belt regions far enough into April that planting delays will tend to drive farmers to plant more soybeans and less corn, since soybeans do better in wet conditions and with late planting than does corn. Fertilizer supplies are also low and since soybeans do not need nitrogen fertilizer as corn does, this gives an incentive to switch acreage to soybeans.

Meanwhile, the government requirement for ethanol use in gasoline blends is not going to diminish, so the ethanol cost will be driven sharply upward as the supply of corn diminishes and food and livestock demand remains. In fact, hog prices have been so low that farmers have been holding them back from the market in hopes of better prices. Meanwhile, these larger numbers of hogs have to be fed. Cattle stocks are also running high.

So, analysts are expecting the new corn crop prices to fluctuate between $6.20 and $6.55 per bushel, further driving the costs of corn products, beef, pork, and chicken upward. Ethanol will also increase in cost and there will be probable increases in the subsidies for ethanol so that ethanol production and use in gasoline blends will increase as Congress has determined it will. So as taxpayers, food consumers, and as users of transportation your costs are going to go up, up, and up some more. Tell your local politicians how grateful you are for their wise policies with respect to ethanol, energy in general, the environment, global warming, and taxation!