Rising Ethanol Demand and Corn Prices

Market and food industry analysts have been forecasting higher food prices as the result of increased demand for corn from ethanol refineries. Increased demand for corn from ethanol competes with the demand from livestock producers, meatpackers, and grocery manufacturers and drives up the market price of corn. Over the past few years, ethanol demand has increased and is projected to increase further in coming years. For the first time in recent memory, farmers are consistently receiving prices for their crops like corn, soybeans, and wheat that are above the cost of production. 

The increased demand for ethanol has undisputedly tightened up the market for corn and contributed to the rise in the corn price on the commodity markets. In early 2007, domestic ethanol refineries could produce 5.6 billion gallons and if all of the plants already under construction come online, total ethanol capacity could be 11 billion gallons by 2011. Recent congressional energy legislation both provides loan guarantees for new ethanol refineries and sets mandatory targets for renewable transportation fuel, which in the short term will be nearly entirely ethanol. During the 2005/2006 crop year, about one seventh (14 percent) of the corn crop was refined into ethanol and that could double by 2016.  

Corn prices have been higher in 2007. Corn prices rose to about $3.50 per bushel in the summer of 2007 compared to prices hovering around $2.00 a bushel since the 1996 Farm Bill. Contrary to the claims of the food and meat processing industries, these prices are not completely out of historical ranges of nominal or real, inflation-adjusted corn prices.  Food and meat producers as well as media outlets have described the recent rise in corn prices as out of synch with historic trends. For example, the Washington Post reported that corn prices had risen above the  “historically stable $2 per bushel” baseline.

Historic Nominal Corn Prices Volatile But Above $2 Per Bushel

Corn prices have neither been historically stable nor hovered around a $2 per bushel baseline. The USDA considers $2 a bushel prices to be on the low end of the scale.  According to USDA, corn “prices have been low, around $2.00 per bushel” because of robust production in the most recent seasons (2004/2005 and 2005/2006). Nominal corn prices – the current price measured in non-inflation adjusted dollars – have been above $2 a bushel for the majority of the past several decades and real corn prices (adjusting for inflation) were considerably higher. Nominal corn prices have been low and declining since the 1996 Farm Bill shifted U.S. commodity policy to promoting over-production. 

In fact, the nominal price that farmers received for corn has been above $2 a bushel during three quarters of the months between 1980 and 2006. Between 1980 and 2006, the corn price averaged $2.37 per bushel, but that includes two significant agricultural depressions in the late 1980s and late 1990s. The average corn price in the 1980s and 1990s was about $2.50 per bushel ($2.47 and $2.44, respectively), although it was lower in recent years averaging $2.12 between 2000 and 2006.

Real Corn Prices Declined for Three Decades

Nominal prices tell a poor story because they do not account for inflation. Even if corn prices had remained at an illusory $2 per bushel historic prices, $2 was worth more in prior decades than it is today.  The real price of goods has been rising for several decades, so, in theory, average corn prices of $2.47 per bushel in the 1980s should be much higher now.  In 1980, the farmgate price for corn was $2.70 and a new Ford Mustang cost about $6,000.  Today, the base model Mustang runs about $19,000 and corn is selling for as much as $3.70 – meaning the price of Mustangs more than tripled and the price of corn increased by a little more than a third.  Additionally, the cost of the fuel, fertilizer, and labor used to produce corn has risen much faster than the nominal farmgate corn price.

The historic real, inflation-adjusted price of corn has been considerably higher than $2 a bushel. Between 1980 and 1984, the real price of corn averaged $6 per bushel compared to $2.37 per bushel between 2000 and 2004.  Even over a longer period, the real price of corn was higher than today. Between 1980 and 2006, the average farmgate corn price was $3.62 in 2006 dollars.

The real farmgate price of corn has been declining for the past several decades. The real price of corn during the 1980s was $4.88 per bushel – more than a dollar more than farmers are receiving today.  In the 1990s, the real price of corn was $3.30 per bushel, which is comparable to today’s prices which have been criticized as unusually high. Examining five-year averages since the 1980s, the real farmgate price of corn has declined during every period, falling from $6.00 per bushel between 1980-1984 to $2.37 between 2000-2004. Contrary to many media reports, the real price of corn has only hovered around $2 a bushel since the 1996 Farm Bill. 

Although corn farmers are receiving higher prices in the summer of 2007, they are not guaranteed to last – historic volatility and the potential for increased production could depress corn prices. Higher market corn prices and higher anticipated demand from ethanol refineries have already encouraged farmers to plant more corn than ever. In 2007, farmers planted 92.9 million acres of corn, 19 percent more than in 2006 and the highest level since the United States was feeding war-torn Europe in 1944. The higher projected supply from the additional acres being brought into production is likely to increase supply, loosen demand, and lower farmgate prices. When the USDA released the near-record corn acreage for 2007, corn commodity futures contracts slid to their lowest price in eight months.   Additionally, international corn production is expected to rise as well, further dampening global corn prices.

< previous | next >