Biofuels and Bad Weather

America’s Food-to-Fuel Gamble

June 16, 2008

Biofuels and Bad Weather: The Effects Of Poor Corn Production

The grain trading markets respond very quickly to news about bad weather interfering with crop production. On June 10th, the day the USDA released their weekly Crop Progress report, corn prices surged to a new record of $6.73 per bushel on the Chicago Board of Trade.24 In contrast, the average annual price of corn for 2007 was $3 per bushel. Previously, on April 1st, the day after the USDA released their annual planting intentions report announcing corn acres would fall 8 percent over 2007 levels, prices rose to a then historic high price of $5.88 per bushel.25 On the press call, former Chief Economist Collins warns,

“We’re not in normal corn and soybean markets right now and the growth in biofuels ensures tight supplies and high prices for at least two years. There is no cushion if we have a weather-reduced crop.”

Collins went on to explain that currently US corn exports are expected to be down 16 percent and feed use down 14 percent for the 2008 crop year. If the US has a poor crop, the domestic feed and fuel users will be highly vulnerable to financial consequences. Regarding the impact on the livestock industry, the affect is quick for poultry but slower for beef and hogs due to the inability of chickens and egg laying hens to tolerate substitutes to corn in their diet. Collins points out, “There’s a substantial increase in beef cow slaughter going on now. Beef cows were 10 percent of total cattle slaughter in the first quarter, up from 8.5 percent (in this time period) in 2006, so liquidation of the herd is occurring and this will show up slowly in higher meat prices.” Also on the press call, Economist Bill Lapp continued that,

“The impact on food inflation will be dramatic and I don’t see how we can avoid it. As of April 2008, bread prices were up 14 percent, vegetable oil was up 12 percent, eggs were up 30 percent. Prices will probably rise even higher in 2009…You can’t have the price of one commodity run away without the others moving in tandem. My theory is that with the global economic growth, the geopolitical uncertainty, the weak dollar, China’s food demand, and food use as fuel is driving us to a new price plateau – wherein the prices of commodities and food jump up but don’t come back down. My assessment is that from 2008 to 2012, the average annual rate of increase in the CPI will be 9 percent.”

In recent years, the U.S. Consumer Price Index (CPI) for food, which tracks retail food prices, has increased around 2.5 percent per year but increased 4.0 percent in 2007 and is expected to be even higher in 2008. Overall, Collins concludes that the cold and wet weather conditions for corn production are pushing yields below trend and with little prospect for more acreage, “production is very likely to be well below demand.”26