Industry Market Trends

What's Been Worse for U.S. Corn Crops: The Drought or Rising Ethanol Production?

Dec 21, 2012

Credit: AgriLife Today

The drought is affecting the corn harvest, as droughts tend to do. Back on August 31 the U.S. Department of Agriculture noted "a significant rise in the proportion of poor and very poor corn crops this summer, due largely to the extreme drought across much of the center of the nation."

According to EcoWatch the USDA's Agricultural Weather and Drought Update for August 16 found "85 percent of the U.S. corn crop is located within a drought area, with nearly half of the crop area experiencing extreme or exceptional drought levels."

The Financial Times noted the week before Christmas that "60 percent of the U.S. high plains, a critical wheat production area in the center of the country, was suffering from extreme or exceptional drought, up from 58 percent the previous week," with the hardest-hit areas being Nebraska, South Dakota, Kansas and Oklahoma.

In fact, the drought is so bad that according to reports from the Greeley Tribune in Colorado, farmers are finding it worth their time to go back in the fields and harvest the leftover corn stalks to sell as feed, which they normally just till back into the soil. "In most years, corn stalk hasn't been valuable enough to justify the expense of baling it," the Tribune notes, adding that corn stalk usually helps add nutrients and capture moisture in the soil, so farmers don't bale it unless they really need the money. And with the drought this year, many farmers really needed the extra product to sell.

Don't worry about running out of popcorn, though. As the USDA explains, there are three major types of corn in the United States, and "field corn," used for animal feed, ethanol, and processed corn products (such as food-grade corn oil and corn syrup) accounts for 98 percent of all corn grown in the United States. Sweet corn -- what you put on the table for dinner -- and popcorn account for only 2 percent of the nation's corn crop.

So when you hear people talk about the drought raising food prices, it isn't a scarcity of table corn they're talking about. It's a scarcity of feed corn, meaning animals raised for meat must be given more expensive feed, which means they'll cost more at the supermarket.

Which is where ethanol comes in.

Ethanol is produced using field corn. It isn't a choice of using an ear of corn for ethanol or giving it to a person to eat, it's a choice of using an ear of corn for ethanol or giving it to a pig or cow to eat to produce milk or meat for a person to eat.

No problem, simply shift more of the corn crop to feed. Sorry about that, ethanol, but affordable food is more important. It might be that easy, if it wasn't for the RSF.

In 2007, President George W. Bush signed the Energy Independence and Security Act, which decreed a "renewable fuel standard," or RFS, "requiring domestic refineries to mix a certain volume of biofuels every year." What this means is a government-mandated boon for field corn growers. You might remember that critical presidential primaries are held in Iowa. A lot of registered voters in Iowa grow a lot of field corn. You get the picture.

Corn being unloaded from a truck will begin the process of converting to ethanol at the Lincoln Energy Plant in Iowa. Ethanol production in the U.S. has been having an unintended impact on the cost of meat, dairy and other foods. Photo by Todd Post. Credit: Bread to the World.

According to Dave Juday, commodity market analyst and principal of The Juday Group, writing in Your Houston News, the quota for 2013 is 16.55 billion gallons, "set to increase substantially next year, and every year until 2022, when the goal is 36 billion gallons of biofuels," or as Juday says, "more than 25 percent of our current total fuel use."

The result, as is usually the case whenever government mandates purchase levels instead of allowing the marketplace to handle it, is skewed production numbers. "The amount of corn used to manufacture fuel has jumped 382 percent" since these mandates were implemented, Juday writes, adding that corn production has only increased 5.4 percent, with the result that currently, "fully 40 percent of our nation's corn supply goes to ethanol," more than goes to feeding livestock.

Juday connects that with the fact that "poultry prices are 3.4 percent higher this year compared to 2011. Milk and dairy prices are up 9.1 percent, pork 7.5 percent and hamburger 10.4 percent." More expensive ingredients means more expensive product.

In fact, the situation was so dire that in August a group of bipartisan governors asked the U.S. Environmental Protection Agency to please waive the federal ethanol mandate this year, citing "the harm that the Renewable Fuel Standard is causing to the poultry, dairy and livestock sectors and related businesses -- and by extension to consumers," according to Geoffrey Styles, managing director of GSW Strategy Group, an energy and environmental strategy consulting firm.

On Nov. 16, the Obama Administration's EPA told the governors it would not issue  any waivers, claiming that "the RFS volume requirements will have no impact on ethanol production volumes in the relevant time frame, and therefore will have no impact on corn, food, or fuel prices." As Styles says, if that were true, "then it's not obvious why the mandate should exist at all."

Corn farmers and ethanol producers are happy. Corn farmers continue getting high prices for their scarce commodity and ethanol producers continue to benefit from artificially-created market demand. Livestock producers, some environmentalists and "U.N. officials concerned with world hunger" are not happy.

As Mark Rohr, chief executive officer and chairman of Celanese, a Fortune 500 global technology and specialty materials company based in Dallas, which is a member of the Domestic Fuels Solutions Group points out, the idea behind requiring ethanol production is to wean ourselves off foreign oil.

But domestic crude oil production is up well over 10 percent since 2007. We are, in fact, weaning ourselves off foreign oil -- there's such a shale oil boom in North Dakota right now they're having trouble filling all the jobs. The world has changed since 2007.

Hence, Rohr suggest, as evidence mounts that an inflexible, obsolete RFS is harming the world economy -- "World Bank researchers - among many others - have blamed the depletion of corn from our food supply for soaring global food and feed costs" -- instead of simply doing away with the ethanol requirement, "policymakers should revise the RFS to promote new alternatives for ethanol production, using technologies that were unavailable in 2007."

In other words, the idea behind RFS was good, but there's not reason to stay married to the idea that corn-based ethanol is the only way to achieve it. Except, of course, for the Iowa primary.