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Tuesday, September 30, 2014

Schwenke on Corn Prices, Food Prices and Opportunities

Russel Schwenke, KyCorn President
As the corn supply continues to grow, prices continue to drop. According to an AgriVisor analyst, the price of corn has dropped so much that an ounce of gold can now buy more than 370 bushels of corn, the most since 1975. So it goes with the laws of supply and demand. While many of us in grain production obviously see below breakeven prices as a detriment to our farm enterprises, this may provide us an opportunity to build our customer base. First, however, we must set the record straight about food vs. fuel.

Just two years ago, the corn industry was taking a real lashing from Mother Nature, corn buyers, and food retailers. The U.S. was suffering from one of the worst droughts in history. Corn prices rose dramatically, which is only beneficial if you have a crop to sell, and all fingers pointed toward ethanol as the culprit. Food processors and everyone else down the marketing chain pumped up their prices to follow suit and lobbied tirelessly, even still, to overturn the Renewable Fuels Standard.

While we would now expect to see food prices begin to drop dramatically, that is not likely. A recent report released by the Renewable Fuels Association said fluctuations in corn prices do not significantly affect consumer food prices. This is true even for food items for which corn is a major input, like cereals, snack foods, meat, milk, and eggs. In fact, Consumer Price Index data show there is virtually no correlation at all between monthly average corn prices and retail food price changes since 2007.

The report went on to say that the real driver of food price change is the price of crude oil and energy. In fact, the United Nations' food price index has been almost perfectly correlated with world crude oil prices since 2000. Every link in the food supply chain is reliant on crude oil and refined products in some way.

Isn't this the perfect time to work to strengthen alternative, renewable fuels? Cheaper corn means cheaper ethanol, which translates to cheaper prices at the pump for ethanol blended fuels. The word on the street is that the EPA may still reduce the biofuel targets for the RFS, but not by as much as they originally proposed. USDA Secretary Vilsack said the federal government is committed to increasing annual U.S. ethanol production to 15 billion gallons a year, the level set by Congress.

Another exciting opportunity is the revival of livestock production. Cattle prices are high right now, and livestock producers are able to make some money. As a beef producer myself, I know that growing beef cattle numbers will help increase demand for grain.

Trade is also a market that needs further development. To help exports of corn and corn products such as distillers grains and ethanol, your Corn Growers Associations are pushing for modernized Trade Promotion Authority (TPA) legislation. This would improve our nation's ability to advance trade agreements that open new markets for U.S. farmers. China is still a major factor as well, and the KyCorn checkoff-supported US Grains Council is encouraging Chinese officials to approve specific biotech corn varieties. While the ban has not yet been lifted, Bloomberg News reported that Chinese regulators are considering a change to their inspection policies.

It will be a couple years to get corn demand and prices built back up to a level that benefits everyone. It's not going to be a quick fix. I do see the silver lining, however. The greater supply this year will help us weather any future storm that may come up and proves that long-term infrastructure is crucial to our success. There are many opportunities that a growing, lower-cost corn supply will provide for the broader agricultural community, and it may very likely give us an advantage down the road.

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