Global warming causes 50% boost in volatility
If you think corn price volatility is extreme now, just wait. It could get a whole lot worse in the future. The good news: volatility creates marketing opportunities galore. The bad news: volatility of this magnitude means you better be prepared for the ride.
According to a new study by Purdue University ag economist Thomas Hertel and Stanford University earth scientist Noah Diffenbaugh, corn price volatility could increase by almost 50% from 2020 to 2040 compared with recent history. The predicted instability in prices is attributed to future climate conditions and continued ethanol mandates.
"The climate change impact is driven primarily by intensification of severe hot conditions in the Corn Belt," Hertel says.
He admits this is the most extreme possible outcome. New corn hybrids that adapt better to high heat, a shift in corn production further north and/or more flexibility in ethanol policies could substantially lessen the dire predictions in the study.
Even if climate change stays under the accepted limit of 3.6°F above pre-industrial levels, temperatures could still make damaging heat waves much more common in the Corn Belt.
"The likelihood of increasing occurrence of severe hot events in response to [higher] global greenhouse-gas concentrations poses a particular risk for all field crops," the study says. Historically, these crops have shown high sensitivity to severe heat.
The computer models coupled with the economic, climatic and agricultural data the authors used show the 22% corn price volatility that occurred from 1980 to 2000 increasing to 48% during the 2020 to 2040 period.
Energy Element. One additional determinant of volatility is changes in oil prices, Hertel says. For example, an oil price of $53 per barrel fuels the volatility frenzy more than an oil price of $200 per barrel. At $53 per barrel, many ethanol plants would likely shut down as ethanol production plummeted, and the ethanol mandate would rule the day, he continues. With high oil prices, however, ethanol plants run full tilt, offering an important added source of demand adjustment to yield shocks.
Elimination of the ethanol mandate reduces price volatility from 200% to 109% in the future-climate/low-oil-price scenario. "The highest corn price volatility occurs in the 2020 scenario when the mandate remains in place," Hertel says. There’s no question, he adds, that corn prices will go higher—and be more volatile—if the ethanol mandate continues.
(At press time, several livestock groups and a growing chorus of governors had called on the federal government to lift the ethanol mandate. However, most observers think the mandate will stay intact this year, particularly before the November election. In 2008, which was another election year with high corn prices, the Environmental Protection Agency denied a petition to lift the ethanol mandate.)
In Diffenbaugh’s view, climate change has the most impact on corn price volatility of all the factors considered because of the number of heat units that occur. "Climate affects corn supply and price," he notes. "Doubling of yield volatility over the next three decades means a fourfold increase in price volatility."
The authors conclude that economic influences can interact with increased climate volatility to generate significant commodity price variability in the coming decades. "This price volatility in response to supply-side shocks will be dampened by closer integration of the corn and energy markets, however," they add.
The study found that the impact of a climate-induced increase in corn price volatility on overall food prices in the U.S. and other countries would be quite small. However, the effects could be much larger if a similar increase in the frequency of severe events occurs simultaneously in other growing regions, as pro-jected by numerous global climate model simulations.
The predicted Corn Belt yield variability is significant and would be unprecedented, Hertel says. Asked the bottom-line question of what kind of prices an increase in global warming would produce, Hertel responds that specific price predictions are not what the study focused on. "If we knew that, we’d be in the commodity business."
- September 2012