Oil at $70/barrel suggests that corn should be cheaper than it is—maybe 75¢ to 90¢/bu cheaper.
That's if you use strict conversion formulas going from crude oil prices to gas prices to ethanol prices to corn prices. But we don't live in a perfect world. Market forces, emotions and politics don't pay attention to mathematical formulas—at least in the short term.
In an analysis published last week by Iowa State University (ISU), Bruce Babcock runs through the numbers. Babcock is director of ISU's Center for Agricultural and Rural Development. Here's how his numbers pencil out:
• "If crude oil prices stabilize at $80/barrel, the price of corn will stabilize at approximately $3.77/bu.”
• "If crude oil climbs once again to $120/barrel, then we should see corn prices climb again to the $6/bu mark.
• "If crude oil falls to $50/barrel, then the ability to pay for corn by the ethanol industry will fall back to around $2.15/bu.”
For Babcock's entire analysis, go to: http://www.card.iastate.edu/iowa_ag_review/fall_08/article1.aspx
But Babcock is quick to point out that we'll never see $2/bu corn again, or at least as long as the U.S. Renewable Fuels Standard is law. The reason: Under the Renewable Fuels Standard, gasoline blenders must blend 10.5 billion gallons of ethanol next year, and 12 billion gallons in 2010.
Yes, some of that ethanol could be imported from Brazil. But with "low” oil prices and import tariffs, it's doubtful more than 5% of those mandates will come from Brazil, he says.
To produce 11.5 billion gallons of ethanol in 2010 will take 4.2 billion bushels of corn. And if we need 8.7 billion bushels for food and livestock feed, that means U.S. corn growers need to produce nearly a 13 billion bushel crop next year. That will require 90 million acres of corn plantings.
"Simply put, U.S. farmers will not plant 90 million acres of corn if the price of corn is $2.15/bu because this corn price would not cover the additional production costs of planting corn after corn,” says Babcock. "It will likely take a price of more than $3.50 to $4/bu to induce farmers to plant the required acres.”
Here's the cold, hard truth: "At this point, 2008 [corn] prices will not fall any further. The bottom line is that ethanol mandates place an effective floor under corn (and soybean) prices,” says Babcock.
So there you have it. The food versus fuel debate marches on. And dairy producers and livestock feeders continue to lose.
--Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at email@example.com.
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