Iowa Ag Review: Volume 13, Issue 3
Concern is growing that expanded biofuels production means the end of inexpensive food. After all, the prices of corn, soybeans, and wheat have dramatically increased and are likely to stay high. The line of thinking that expects expensive grains and oilseeds to lead to dramatically higher food costs follows the logic often used by proponents of U.S. farm programs. Many proponents justify subsidies by claiming that farm payments work to keep food plentiful and inexpensive by artifi cially keeping the price of commodities lower than production costs. For this justifi cation to be valid, farm subsidies would have to expand commodity production, thereby lowering commodity market prices. Lower prices would then, in turn, lead to an expansion in the production of the food that all of us actually eat (pork chops instead of no. 2 yellow corn), which would cause food prices to be lower than they would be otherwise. Thus, according to the argument, we do not need to spend as much of our income on food. By the same logic, high commodity prices caused by subsidized biofuels should result in a reduction in the production of food and higher food prices.
I n July of 1958, our center was founded as the Center for Agricultural Adjustment, under director Earl O. Heady, and began operation. This fall, the Center for Agricultural and Rural Development will kick off an academic year that not only celebrates our 50-year history but also, in keeping with our founding mission to help improve the condition of the Iowa agricultural economy, sets a course for CARD’s commitment to addressing the wide range of challenges in agriculture—in trade, food, renewable fuels, and resource policy—today and for decades to come.
The future looks bright for corn, soybean, and wheat farmers. Corn farmers can lock in a price on the Chicago Board of Trade of $4.00 per bushel for their 2008, 2009, and 2010 crops. Soybean farmers can lock in $9.00 per bushel for 2008 and 2009, and wheat farmers can lock in $5.50 for the same two years. After adjusting for basis, this corn price is 65 percent greater than the average price received by corn growers for their 2002 to 2005 crops. The soybean price is up 42 percent and the wheat price is up 51 percent over the 2002 to 2005 levels. If futures contracts traded out even further, there is no doubt that these high prices could be locked in for an even longer period.
The ethanol industry continues to reshape Iowa’s agricultural economy. By the end of this summer, 28 ethanol plants will have spread across the state, capable of producing over 1.9 billion gallons of ethanol per year. Twenty more plants are being constructed in Iowa, with plans for even more. The tremendous growth of the ethanol industry has put pressure on Iowa corn producers to keep up with this growing demand for corn. Producers have responded by planting 14.3 million acres of corn, the second-largest corn area in Iowa on record. (In 1981, Iowa had 14.4 million acres of corn.) The pull on corn from the ethanol industry, combined with the push from Iowa and U.S. corn producers, has resulted in some dramatic price movements for corn over the past year. As Figure 1 shows, since September of last year, the corn market has experienced a strong run-up in prices and an increase in price variability. The growth in ethanol’s demand for corn drove prices up through the harvest period last year and maintained corn prices at around $4 per bushel over the winter. The acreage response hit the market in two waves, around the USDA acreage reports released in March and June of this year. The prospects for increased corn production have reduced corn futures prices to below $3.30 per bushel.