Drought fuels corn woes

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Drought in the United States has put a heavy dent on corn crops, forcing prices to rise significantly. (SETH PERLMAN / THE ASSOCIATED PRESS ARCHIVES)

The blistering U.S. drought has sparked a heated debate over whether the ethanol industry should be sacrificed to spare livestock feeders and food processors from crippling corn prices. They're asking whether corn needed to feed people and animals should be going into fuel tanks. It's a tough one to answer, but is it even the right question?

Back in the days of $3 corn, it seemed like a good idea to turn it into ethanol, even if it took a few subsidies and a legislated mandate that gasoline has to contain a minimum percentage of ethanol.

Not only would this boost prices by eliminating burdensome carry-overs, it would partly diversify the U.S. away from imported energy and create rural jobs at ethanol refineries. Even though its status as "green energy" has always been controversial, it seemed like a win-win-win policy decision.

By any measure, you'd have to say the policy worked. Today, as much as 40 per cent of U.S. corn goes into ethanol, and prices of late have topped $8 with the potential to go higher.

But with drought tightening supplies, other users are suffering. Unable to afford feed, livestock producers may have to sell their herds, which means higher meat prices. And given most of the food we eat contains corn or one of its derivatives, food prices generally are set to rise as this weather disaster works its way through.

These developments have global implications. The U.S. is the world's largest corn exporter. Even here in Canada, the hog industry has been thrown into another tailspin by rapidly rising feed prices.

The UN is poised to call an emergency summit to discuss the implications of rising food costs. It is pushing the world's poorest down the food chain, and has a politically destabilizing effect at a time when many governments are already wobbly.

Demands are growing for the ethanol-blending mandate to be reduced or waived until the supply shortage has passed. But is the problem ethanol or a lack of buffer stocks?

The free market philosophy shuns the idea of maintaining emergency stocks because it dulls the ability of price signals to regulate supply and demand.

It's true that in the past, the vast surpluses accumulated under European and U.S. farm policies were counterproductive. Governments of the day were propping up domestic prices by buying up the excess supply and either storing it, giving it away as food aid or eventually dumping it on the world market in a failed attempt to buy market share. Less understood was the value as a buffer against shortages.

U.S. agricultural economists Daryll E. Ray and Harwood D. Schaffer point out the latest USDA World Agriculture Supply and Demand Estimates forecast corn production is set to drop 12.8 per cent this year and use is expected to fall 10.1 per cent.

The drop in use is higher than in past droughts. For example, the corn harvest in 1980 was 16.3 per cent lower than a year earlier but use fell by only 4.2 per cent. In 1983, a combination of reduced acreage and drought resulted in a corn harvest that was 49 per cent below the year before, but "even with half a crop, corn utilization declined by a mere 7.7 per cent and corn exports matched the 1982 level," they note.

In 1988, corn production was 30.9 per cent lower, while corn utilization dropped by 6.4 per cent. In 1993, the corn crop was down 33.1 per cent and use by 10 per cent.

The difference between then and now was buffer stocks. The U.S. entered the crop year in those earlier droughts with more than two billion bushels in a combination of private and government stocks.

The programs that maintained these buffers are gone and corn users are left to feel the full brunt of this year's production shortfall.

If it starts raining, corn production could be back on track as early as next year. But if livestock herds are culled, it takes years to rebuild that source of demand. Kill the ethanol industry now and it won't start up overnight, either.

The idea of buffers is hardly new. The Bible tells of Joseph interpreting the pharaoh's dream of seven fat and seven lean cattle as a sign to gather grain from seven years good production from the seven poor ones to follow.

Ray's and Schaffer's analysis shows the effect of past droughts was mitigated by holding buffer supplies.

If the objective is building stable industries, which contribute to a stable economy, it seems rather impractical to cling to an ideal that frequently throws key sectors into turmoil.

Laura Rance is editor of the Manitoba Co-operator. She can be reached at 204-792-4382 or by email: laura@fbcpublishing.com

Republished from the Winnipeg Free Press print edition August 25, 2012 B8