Economists worry about the effect of higher corn prices

Some economists worry that the instability of foreign oil is being replaced with another kind of instability -- dependence on a crop increasingly in demand and subject to the vagaries of the weather. Part of the concern is over what could happen if a drought seriously hurt the Midwest corn crop, deepening the hunger for a commodity already planted on 80 million acres of America's midsection.

This is not doomsday speculation, though the primary concern of the moment in the Midwest is the potential for flooding. State climatologist Dr. Pat Guinan said the cold-water ocean phenomenon known as La Nina is expected to continue through autumn and cause dryer than normal conditions in the upper Midwest. Iowa, northwestern Illinois, all of Wisconsin and a good portion of Minnesota would be affected.

"There is a potential for drought over that part of the country," Guinan said.

Some economists have predicted the May corn currently valued at $5.725 a bushel could jump to $8 a bushel in the event of a severe drought.

Global demand and subsidies for developing alternative fuels already have pushed corn prices 20 percent higher just this year. Droughts in Argentina, Brazil and Australia last year increased demand for U.S. corn, and China is buying more and more corn as its economic engine speeds up. China also has placed a tariff on its own corn exports to keep its grain in the country.

Most of the corn produced in Southeast Missouri goes down the Mississippi to be shipped overseas. Seventeen percent of U.S. corn production is exported.

Though ethanol accounts for a small part of the gasoline market -- 3.5 percent -- 17 percent of the feed corn grown in the U.S. currently goes toward ethanol production. That amount is projected to increase to as much as 30 percent by 2017.

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Signs the $5 billion in government ethanol subsidies of the last two years are affecting other parts of the economy are appearing. Last week, the largest poultry company in the U.S. cited the higher cost of corn-based chicken feed in closing a North Carolina plant and five distribution centers that employed 1,100 people. Pilgrim's Pride blamed the ethanol subsidies for raising feed prices. The farm bill being finalized in Congress provides another $10.5 billion in subsidies for corn producers over the next five years.

Feed corn is different from sweet corn, the corn that comes in cans and is eaten off the cob. About half the feed corn grown in the U.S. goes to livestock and less than 10 percent into other products used by consumers. Still, corn is ubiquitous. It's in the whiskey we drink, in our batteries, our cereals, our carbonated beverages, in margarine and licorice, in insecticides and carpets.

A new documentary film called "King Corn" warns that corn is playing a role in America's fast-food obesity epidemic. The beef in a burger was corn-fed, the french fries probably were cooked in corn oil and the soda was sweetened with high-fructose corn syrup.

The size of the corn crop is growing rapidly. U.S. farmers produced a record corn crop last year. They planted more than 12 million more corn acres and almost 10 million fewer soybean acres in 2007.

Breakfast cereals

2007 was the second-largest year on record for corn production in Missouri. Southeast Missouri led the state with an average yield of 172 bushels per acre. Mississippi County's yield of 188 bushels per acre led all counties in the state. Stoddard County's total production of 20.2 million bushels was second only to Atchison County. Cape Girardeau County corn farmers produced 5.9 million bushels, Scott County 14.5 million bushels and Bollinger County 1.7 million.

The soybean option

Jerry Cox farms 1,100 acres of corn and 900 acres of soybeans near Delta. He has not increased the amount of corn he grows because soybean prices have increased dramatically alongside those of corn, going from about $8 a bushel last year to about $13 a bushel now.

Recent increases in corn acreage created more demand for soybeans as fewer were being grown, Cox said. "You can't have high prices of one and cheap prices of another."

Wheat bread

In the event of a drought, soybeans are a smaller risk because they don't require the costly nitrogen fertilizer corn does, Cox said. He can grow soybeans for about $175 less an acre than corn.

But Cox's crops are almost drought-proof. Eighty-five percent of his are irrigated by wells. In fact, a drought increases the price he can get for his crops.

Dr. Kim Dillivan, a Southeast Missouri State University professor who specializes in agriculture economics, argues that rises in commodity prices due to drought usually don't have a substantial effect on consumers. For instance, the value of the corn in a $3 box of cornflakes is 2.7 cents. A rise in corn prices isn't going to change the price of cornflakes much. Other factors could.

The notion that food and energy economies were ever separate is false, Dillivan said. "Food requires energy to produce. About 5 percent of the food dollar is energy."

Salad dressing

He said a 1999 drought that primarily affected the Northeast and Northwest and to some extent the Southeast accounted for $1.35 billion in farm losses, still only 3 percent of the total net farm income that year.

The effects in the drought areas can be more pronounced, Dillivan said.

He grew up in Iowa and remembers the severe drought of 1988. Even in a drought, he said, the amount of rain that falls within a given state can vary greatly. With significant amounts of irrigation and modern farming techniques, a drought of a limited period isn't going to devastate the market, he said. "Yields go up each and every year."

Southeast Missouri suffered a drought last year but still produced a bumper corn crop. "Basically the corn got made prior to the drought," said Gerald Bryan, director of the University of Missouri Extension Service in Cape Girardeau County.

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Ethanol production is not having much influence on corn prices at this point, he said. "But if corn prices double what they are now, then it will definitely have an effect on ethanol plants."

He said the plants would pay more for their corn up to the point where their profit margin gets slim. Then plants might shut down because selling their corn may be more profitable than processing it for ethanol.

Dillivan thinks increasing demand for ethanol has little effect on food prices. Farmers receive only a nickel of each dollar spent on food. The rest is spent on packaging, transportation and marketing.

Bryan said cattle producers are probably most affected by high corn prices. Their prices haven't gone up in league with the price of the grain they feed their cattle, while fertilizer prices have doubled. Fertilizer contains nitrogen made from oil. Some fertilizers are made of phosphorus from potash. "Refining it requires energy," Bryan said. "Getting it to the market requires fuel. High fuel prices affect most every part of the economy."

Plans to diversify biofuel sources, including using switchgrass and even wood, will prevent a scenario in which an overdependence on corn comes back to haunt the U.S., Bryan said.

Overdependence on corn to make alternative fuels would not be a good for the country, Cox said, but the negative talk about ethanol going around does not take into account the whole picture. "We will never grow enough corn to replace all the oil. I absolutely agree," he said. "But it's a step in the right direction. We're looking for alternatives."

If all the ethanol currently being produced were taken away, gasoline prices would be significantly higher than they are now, he said.

Whether Missouri will have precipitation near normal or above normal this growing season is a toss-up, Guinan said. Farmers in the southern part of the Bootheel are just beginning to plant corn. By the last week in March, farmers in Scott and Bollinger and Cape Girardeau counties expect to join in. "As soon as the ground dries up and I can get in the field," Cox said.

sblackwell@semissourian.com

335-6611, extension 137