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Ethanol, Corn Supply, and Those Who Cry Wolf

January 13, 2011

           

Earlier today, USDA released its final report on the size of the 2010 corn crop and supply, as well as its updated estimates of corn use.  The January report did make a couple of important changes:
  • USDA lowered average corn yields to 152.8 bushels per acre, still the 4th highest in history.  The reduction in yield was partially offset by the addition of 100,000 harvested acres.  Final 2010 corn production as seen by USDA stands at 12.45 billion bushels – the 3rd largest crop in history.
  • USDA increased its demand forecast for ethanol to 4.9 billion bushels for the marketing year (Sept. 1, 2010 to Aug. 31, 2011).  That translates to ethanol production of about 13.5 billion gallons.  Recognizing the contribution of distillers grains and other feed co-products of ethanol production, USDA did lower its livestock feed usage by 100 million bushels.
  • USDA is showing ending stocks of corn at 745 million bushels, down from the previous report.
While not as large as originally thought, the 2010 corn crop is quite robust considering the challenges much of the Corn Belt endured.  With the 4th highest yields and 3rd largest crop on record, American farmers once again demonstrated their ability to produce a safe and abundant corn supply. While domestic corn supplies are lower than last year's record supply, global supplies of food grains like rice and wheat (i.e. those most often used for direct human consumption) remain strong. This report will undoubtedly be like catnip for speculators that will predictably seek to drive commodity markets higher.  This scenario has played out before, most recently in 2007/2008 when all commodities, led by crude oil, soared to unjustified and unsustainable levels. A March 2010 report by the United Kingdom's Department for Environment, Food and Rural Affairs found that "Available evidence suggests that biofuels had a relatively small contribution to the 2008 spike in agricultural commodity prices." Even the World Bank, which in 2008 suggested biofuels was playing a large role in higher food prices, released an analysis in July 2010 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." Moreover, enthusiastic Malthusians and other doomsday prognosticators will use this report to blame biofuels for food insecurities that have existed for decades.  But there is far more to the story than they will be willing to share. The fact remains that global supplies of grains remain sufficient to meet needs.  According to USDA statistics, supplies of key food grains such as wheat and rice are very strong.  The total global grain supply is less than 1% smaller than last year's record supply. The global wheat supply is nearly identical in size to last year's record and ending wheat stocks are projected to be at their second-highest level in the last eight years and 50% higher than 2007/08. Additionally, as ethanol production increases, so too does the availability of feed co-products such as distillers grains, corn gluten feed and corn gluten meal.  Based upon an estimated 13.5 billion gallons of ethanol production in 2010/11, American ethanol producers are providing the world with some 38 million metric tons of livestock feed capable of displacing some corn, soy, and other feed grains in livestock feed rations. Often lost in the debate is the role of global crude oil prices in not only the price of food, but its availability as well.  Faith Birol, chief economist of the International Energy Agency, recently noted that, "Oil prices are entering a dangerous zone for the global economy." Why does this matter?  Oil prices are integral to the cost of production, transportation, packaging, and availability of foodstuffs.  During the height of the food versus fuel frenzy in 2008, agricultural economist John Urbanchuk found that energy prices exerted three times the impact on food prices than did the price of corn. Higher energy prices also mean it costs farmers more to raise a crop.  That same report by the United Kingdom's Department of Environment, Food and Rural Affairs concluded that crude oil prices were a major factor behind the food price spikes in 2008. The report said, "the rapid increase in global energy prices increased the cost of agricultural inputs, especially fertilizers, so increasing the cost-base of agricultural producers, particularly in the cereals and oilseeds sector." Oil prices also have a direct and substantial impact on the cost to transport food and food aid.  As oil prices creep toward $100 per barrel and higher, fuel prices will follow suit.  As such, food producers and those organizations charged with providing food aid are seeing their fuel costs rise and their ability to do their jobs decline. A US Government Accountability Office (GAO) report from June 2008 concludes that food aid organizations spend 65 percent of their budgets on transportation. That's a lot of money going to Big Oil that could be better focused on providing food aid when and where it is needed. Equally important is the role the environment plays in ensuring a safe and adequate food supply.  That is why displacing fossil fuel use with environmentally sustainable biofuels is critical.  American ethanol production lowers emissions of gases that can cause climate change by up to 50 percent compared to gasoline.  Moreover, ethanol production is becoming increasingly efficient.  Water use for ethanol production is down to 2.7 gallons per gallon of production.  Energy needs are down 32 percent since 2001.  All the while, ethanol yields are up 5.2 percent. The innovation on display in American farming and ethanol production should be the model for the rest of the world.  It is in part due to the emergence of a robust U.S. ethanol industry that seed companies like Monsanto, DuPont, and Syngenta have invested in new seed technologies to get more production with fewer inputs and fewer acres.  Just like in the U.S., farmers in developing nations have the ability to dramatically increase their productivity if given the chance and access to the right tools.  Our focus should be on investing in technologies that will help farmers produce more while doing it using fewer inputs.  We have done that in the U.S.  We can do that around the world.