Is food the new crude?
Dermot Hayes addresses how bidding for acres pits fuel growers against food growers.
"In October 2006, the world suddenly recognized the energy value of grains," says Dermot Hayes, leader of the Plant Sciences Institute's Public Policy Task Force, Pioneer Hi-Bred Chair of Agribusiness and professor in the Departments of Economics and Finance. Now, along with an enormous surge in ethanol-producing capacity, a tug-of-war between fuel and food markets (which includes animal feed) has begun.
This change came about following a summer of high crude oil prices and corn prices hovering below two dollars a bushel, creating an enormous incentive to build corn ethanol plants.
Ethanol plants were initially profitable, turning two dollars worth of corn into eight dollars worth of ethanol, and speculators quickly realized this expansion would continue until corn was priced so high that this arbitrage possibility was eliminated, explains Hayes, whose economic analyses have put him at the center of the food-fuel debate.
The surge in corn grain ethanol production gives corn producers another customer, and farmers recognize that under current conditions, the fuel value can often be higher than the food or feed value.
According to Hayes, approximately half the price increase for a bushel of corn, wheat and soybeans is due to bad weather, continuing population growth and panic reactions from the governments of Argentina, China, India, Russia and the Ukraine, where various forms of crop export restrictions have been imposed. The other half is due to increased use of crops for biofuel.
Food importing countries are also responding. Historically these governments protect their farmers from cheap food imports but now are protecting consumers from expensive food by keeping more of it at home and encouraging imports.
High global demand for corn to make ethanol motivates farmers to plant more acres to corn. Other grain crop market prices must then rise or they will be displaced by corn and cause shortages.
But high prices bring new opportunities. Crops loaded with specific traits become economically feasible to produce and innovative crop and cropping designs - like customizing crops to specific types of soil and topography - become financially worth their while, "creating a golden age for plant scientists," says Hayes.
Iowa corn growers replanted drowned out areas this year. When corn was selling at two dollars per bushel or less, this would not have happened, says Hayes. "In ten years, we'll see people using technologies we didn't even think about with two dollar a bushel corn."
