View Full Version : Surely taking corn out of the market will raise the price

30th May 2008, 02:20 AM
(automatically updated/inserted from The Big Biofuels Blog)

I've been in conversation with David Benson, about the roleof biofuels in the current round of food price rises across the world.

We'vebeen chatting in the comments a couple of posts back (http://www.icis.com/blogs/biofuels/archives/2008/05/us-biofuel-industry-says-dont.html#comments). I don't think that we aretoo far apart in our appreciation of the situation.
For what it's worth, I think there are a number of pretty likelyreasons for the rise in food prices.
One of the most important is that the price of crude oil hasrisen over the past year from (http://video.aol.com/video-detail/icis-tv-news-at-one-6-june-2007/4286723325) $65.5/bbl to $130/bbl (http://www.icis.com/Articles/2008/05/28/9127584/noon-snapshot-americas-markets-summary.html) . Thishits the price of food because the price of harvesting it, moving it,processing it, distributing it and taking it home is influenced by the price ofoil. This influence is greater in the developed world, where people eat moreenergy intensive processed food.
Another are distortions caused by trade and byprotectionism. Most countries want to operate their agriculture at a surplus,this keeps prices to consumers down (which helps keep the peace) and farmershappy, through subsidies. There are often difficulties where this process ends, when local farmers can not compete with imports and when these get more expensive (http://www.thenation.com/doc/20080602/bello).
Thirdly, there are distortions in the world market.Protectionism isn't perfect and countries with too much excess production maysell their surpluses in foreign markets at or below their own cost ofproduction and transportation. That's dumping, which spoils otherwise wellbalanced markets. (Fair trade is the best solution but there's no time for that now)

Fourthly, there are futures contracts. These allow farmersto fix the amount of money they will get when their crops are harvested. Butalso they allow speculators* to enter the market and trade the contracts amongstthemselves.

*You may wish to call them investors.
Finally there is the level of production of crops and thedemand for crops.
I'd put more weight on this aspect, than David does. I dothis on the basis that taking 25% of the UScorn crop to use in ethanol in 2007 (http://www.icis.com/blogs/biofuels/archives/2008/01/) effectively reduced the amount of grain availablefor food use by 12% in the USlast year. (In 2007, the USproduced 334.5 million tonnes of corn (http://usda.mannlib.cornell.edu/usda/nass/CropProd//2000s/2007/CropProd-12-11-2007.txt) and 83.6m tonnes were used in the ethanolbusiness).
The USDA says in its baseline prediction for 2008 to 2015for corn (http://www.ers.usda.gov/Briefing/Baseline/crops.htm).

Market adjustments to the increased demand for corn toproduce ethanol extend well beyond the corn sector. Movements in relativeprices trigger supply and demand adjustments for other crops. Higher feed costsaffect the livestock sector, slowing increases in or reducing production of allmeats over the next several years.
If you reduced the volume of a big commodity like corn in abig producer it simply has to contribute to bringing supply and demand closerto balance. Once we get to balance then small distortions in supply will havebig impacts on prices. This may be why the drought in Australia isbeing used as one explanation behind high food costs. Australia accounts for about 1.3% of the worldgrain production, compared with 18% from the US (http://www.fao.org/statistics/yearbook/vol_1_1/pdf/b01.pdf).

More (from The Big Biofuels Blog)... (http://www.icis.com/blogs/biofuels/archives/2008/05/surely-taking-corn-out-of-the.html)