In the words of the immortal Yogi Berra (and in tribute to another effortless sweep of the Twins by Berra’s Yankees in the AL Division Series), it’s déjà vu all over again. Last Friday’s USDA Crop Production and WASDE reports, which slashed estimates for the 2010 corn crop and average yield, sent the anti-biofuels crowd scurrying to find their trusty “Food vs. Fuel” playbooks. The alarmist rhetoric over the past several days seems virtually cut and pasted from the raft of doomsday press releases and manufactured “studies” that cluttered the media channels in 2008 when record oil prices and rampant speculation pushed grain prices to unprecedented levels and food prices to the highest levels in recent memory. For opponents of ethanol and beneficiaries of cheap corn, pointing the finger at biofuels has become the reflexive knee-jerk response any time grain prices start to rise.
But this time, the Malthusians are failing to gain any traction. And for good reason. Every objective re-analysis of the 2007/08 commodities bubble has largely absolved biofuels of having anything more than a negligible role in the grain price run-up and escalation of food prices two years ago. The World Bank, which in 2008 hastily suggested biofuels was playing a large role in higher food prices, released an mia culpa analysis just a few months ago that found “…the effect of biofuels on food prices has not been as large as originally thought…” and that “…the use of commodities by financial investors may have been partly responsible for the 2007-08 spike.” A March 2010 report commissioned by the United Kingdom’s Department for Environment, Food and Rural Affairs found, “Available evidence suggests that biofuels had a relatively small contribution to the 2008 spike in agricultural commodity prices.”
Reporters, policymakers and others who were duped by the well-funded and well-orchestrated “Food vs. Fuel” campaign in 2008 are interpreting the recent wave of rhetoric with a healthy dose of skepticism and due diligence this time around. And once again, a look at the data and facts surrounding the current grain market situation is showing that ethanol is but a bit player in the recent price run-up. Here are some important facts to keep in mind (for much more detail—and some fancy charts—see our new report here.
- Though smaller than originally expected, the 2010 corn crop and average yield would still be among the largest in history. In fact, both the total crop and average yield would rank third all-time.
- The 2010 harvest is only halfway complete. The areas hit hardest by unfavorable weather conditions this summer were among the first to harvest this fall and combines only recently began rolling in areas where some of the best yields are expected. Until the crop is “in the bins,” average yield projections must be interpreted with caution.
- Global grain stocks are substantially higher today than in 2007/08, and the potential reduction in U.S. corn production is likely to be offset by larger-than-expected grain production in other countries. In fact, USDA’s October 8 projection of the global coarse grains supply is slightly higher than its September estimate, despite the large reduction in the estimated size of the U.S. corn crop.
- The 2010/11 global grain supply is projected to be nearly identical in size to last year’s supply, which was the largest in more than 10 years. While ending stocks are projected to be lower than last year, 2010/11 carry-out would be the third-highest in the last eight years.
- It is also worth noting that the U.S. ethanol industry remains a relatively small user of grain in the context of global supplies. In 2010/11, U.S. ethanol producers are projected to use less than 3% of the world grain supply on a net basis.
- The recent run-up in grain prices likely will prove to be grossly exaggerated, due to the unprecedented influx of speculative investment in grain futures. By early September, there was more speculative investment in the corn futures market than ever before—even more than at the height of the 2008 bubble.
- Non-commercial investors (such as hedge funds) and “index traders” together control roughly 4.3 billion bushels of corn—nearly equivalent to the amount of corn the ethanol industry will use in 2010. As we saw in 2008, these investors can have perverse impacts on the market—and they can exit the market just as quickly as they entered, resulting in the collapse of prices.
- When distillers grains are considered, nearly 67% of the new demand for corn in 2010/11 is coming from the livestock sector, while only 25% is coming from increased ethanol demand.
- Farmers around the world respond quickly to price signals from the marketplace. Corn planting is underway in many Southern Hemisphere countries and farmers are planting more acres to corn and less to other crops. Here in the United States, farmers have a history of responding quickly to market signals by adjusting acreage and switching crops to best capitalize on current and expected prices.
- Because world grain stocks are robust, and because energy prices are moderate relative to 2007/08 levels, the outlook for food prices is stable. According to USDA, the Consumer Price Index (CPI) for all food is projected to increase 0.5 to 1.5% in 2010—the lowest annual food inflation rate since 1992. And despite rapid growth in ethanol production in 2009, the all-food CPI increased just 1.8 percent for the year. USDA’s forecast for 2011 food inflation is 2 to 3%, compared to the more normal rate of 3 to 4%.
This time around, we’ve been encouraged that so far the mainstream media hasn’t taken the rhetorical bait on “Food vs. Fuel.” We’re hopeful that reporters and opinion leaders will continue to take a more measured and thoughtful approach to the discussion over current grain market dynamics. Stepping back to take a holistic view of the big picture of the global grain market will certainly add perspective and a better understanding of the many complex factors at play. After all, to quote the visionary Yogi Berra again, “You can observe a lot by just watching.”