On my desk is a manila folder labeled with a four-letter word.
The tab simply reads “corn,” and the file grows thicker every day. I began keeping this file when it became clear that ethanol was going to be a major player in the corn market.
Although corn has always been a key ingredient in swine diets, it’s just a fraction of the demand for the golden grain, directly or indirectly, as an ingredient in most of the world’s food supply and, of course, the production of ethanol.
Not so long ago, we could finish a market hog for $75-80. Now, it costs nearly twice that. Is it any wonder that lenders get a little uptight when they see your major input cost taking such a jump?
My corn file is sandwiched between a couple of others — one marked “mycotoxins,” which was started when quality problems began surfacing as the 2009 corn crop began hitting the bins. Another file, marked “alternative feed ingredients,” contains information on many energy sources that can replace a portion of the corn in a swine diet. At first, this file was packed with information about distillers’ dried grains with solubles (DDGS), but now DDGS has a file of its own. In truth, calling DDGS an alternate feed ingredient is a misnomer because it has become a staple in most grow-finish and gestation diets.
Another nearby file, entitled “pork quality,” has gained some heft in recent years, too. When I first started the file, it held notes and research reports on the genetic effects on meat quality. But more and more, it carries notes and information about the impact of DDGS and other alternative feed ingredients on meat and fat quality in the pork carcass.
This is a big deal. Many packers are keeping tabs on how much DDGS are being fed by their suppliers and for how long. Too much affects fat color, pliability (especially in bellies) and even flavor.
No Flex in Flex-Fuels
Added to my corn file today is a release from Wally Tyner, an agricultural economist and energy policy specialist at Purdue University. Tyner reinforces that the 2007 federal law that helped jump-start the ethanol industry in the United States has caused normal supply-and-demand forces to shift, leaving the livestock, food and export sectors to wrestle with the renewable fuels standard for a share of the corn crop.
Tyner says 27% of the nation’s corn crop will be gobbled up to meet the federal mandate for ethanol this year, leaving 73% to be divvied up by all other corn consumers.
“The renewable fuel standard requires that 15 billion gallons of ethanol be consumed per year by 2015, regardless of what the price of corn is and regardless of what the price of crude oil is,” Tyner explains. “That means ethanol production is totally unresponsive to price. There is no flexibility.”
Economists refer to this lack of flexibility as “inelasticity,” which leads to market volatility and, more recently, to $7/bu. corn.
Tyner says a market disruption of this sort sends economic “shocks” into the system, which pushes prices higher than typical supply-demand pressures would dictate.
One such shock was the cool, wet spring that delayed planting in much of the Corn Belt, leading to concerns about yields this fall.
Another shock — a weak American dollar — gave foreign buyers more buying power, putting added pressure on corn for export markets.
The political unrest in the Middle East drove oil prices higher and made ethanol a more feasible option — another shock — and the very slim carryover stocks of grain this year have added another pretty good jolt to the supply-and-demand picture.
Most of the crop acres that could be rolled over to corn or soybeans have already made the switch — and that reduces flexibility further.
Greater pressure on corn supplies has legislators asking a lot of questions about the ethanol mandate and the federal ethanol subsidy of 45¢/gallon. Although the administrator of the Environmental Protection Agency has the right to waive the (ethanol) mandate if it is perceived to be causing significant economic harm, Tyner says as long as oil prices are high, propping up ethanol’s value, strong competition for corn will continue with or without the mandate.
The late-June release of USDA’s acreage and grains stocks reports may offer a respite from the relentless uptick in corn prices. The smart money will keep a close eye on fall harvest projections and, unless you want to take the corn price roller coaster ride again next spring, it may be wise to secure some of your corn needs through this time next year.