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U.S. corn farmers are reaping the benefits of high prices and ethanol policy, while several senators seek to eliminate subsidies for the biofuel.

Golden age for farmers, not so bright for world's poor

by Anjelica Tan
June 02, 2011

Corn prices

Anjelica Tan/MEDILL

Corn prices have been rising sharply since 2009. Futures for July delivery now trade around $7.60 per bushel at the Chicago Board of Trade.

Anjelica Tan/MEDILL

While about 88 percent of the U.S. corn crop is used either for livestock feed, fuel production or exports, the remaining 12 percent or so is consumed or processed into a multitude of food products.

Despite weather concerns early in the growing season, U.S. farmers are thriving. But poor people here and abroad are hurting. Is it fair?

Net farm income is forecast to be $94.7 billion this year, up nearly 20 percent from 2010, according to the U.S. Department of Agriculture. The 2011 inflation-adjusted forecast is the second highest net farm income recorded in the last 35 years.

“This is a prosperous era for agriculture right now,” said Chuck Cawley, a corn grower in downstate Rochelle and district director of the Illinois Farm Bureau. “We haven’t really seen anything like this since the early ‘70s when Earl Butz was secretary of agriculture.”

Indeed, corn futures trade at about $7.60 a bushel, double the year-earlier price. Less than a decade ago, corn averaged a mere $2 a bushel.

Several factors explain the recent surge in corn prices. On the supply side, the USDA reported corn stockpiles are at a 15-year low. The tight inventories combined with poor weather forecasts are contributing to strong prices.

Robust demand, however, is playing a major role in driving prices up. David Bullock, an agricultural economics professor at the University of Illinois, points to two sources: developing countries and ethanol producers.

Rapidly emerging nations, particularly in Asia, are spurring global demand for food commodities. The growing population of China, for example, is consuming more protein on a daily basis.

“They want meat,” Bullock said, “and they need corn to feed cattle, chickens and other livestock.”

The USDA recently confirmed that China bought 116,800 metric tons of American corn for delivery before Aug. 31. After falling briefly in early May, corn prices rose and continued to climb after the USDA made the announcement on May 26.

On top of booming overseas demand, U.S. pro-ethanol policy is generating high domestic demand for the yellow grain. In its 2011 farm sector forecast, the USDA reported that increased demand for corn is indeed coming mostly from ethanol production.

Last December, Congress renewed a 45-cent per gallon tax credit for refiners who add ethanol to gasoline as well as a 54-cent per gallon tariff on ethanol imports, which come mainly from Brazil.

Ethanol producers and corn growers lobbied Congress to pass the legislation in order to decrease dependence on foreign oil. Early in May, however, Senators Tom Coburn (R-Okla.) and Dianne Feinstein (D-Calif.) introduced a bipartisan bill to eliminate the ethanol subsidy and tariff.

Coburn, a 63-year-old pro-agriculture legislator from a cattle- and wheat-producing state, calls the current pro-ethanol legislation bad economic policy.

“As our nation faces a crushing debt burden, rising gas prices and the prospect of serious inflation, continuing our parochial ethanol policy that increases the cost of energy and food is irresponsible,” he said in a press statement.

The Ethanol Subsidy and Tariff Repeal Act is cosponsored by five other senators: Ben Cardin (D-Md.), Richard Burr (R-N.C.), Jim Webb (D-Va.), Susan Collins (R-Maine) and James Risch (R-Idaho).

Republican presidential candidate Tim Pawlenty is another politician taking a stand against pro-ethanol policy. In his Iowa campaign kickoff, the 50-year-old former Minnesota governor called for phase-out of the subsidy.

Researchers at the Center for Agricultural and Rural Development at Iowa State University estimate that a one-year extension of the ethanol subsidy and tariff would lead to just 427 domestic jobs at a cost of almost $6 billion, or about $14 million of taxpayer money per job.

“Nobody who looks at this and is unbiased thinks U.S. ethanol policy is a good idea. Only people making money from it do,” Bullock said.

Rob Elliot, former president of the Illinois Corn Growers Association, said that while 40 percent of the domestic corn crop goes to ethanol production, about one-third of the amount consumed goes back to the livestock industry. He explained that distillation takes the starch from corn and leaves behind the protein, which is used for feed.

According to Elliot, this means just over 25 percent of the corn crop is used in ethanol and about 55 percent is used on farms for animal feed. The USDA reports the remaining 20 percent is exported. The U.S. is the world’s leading exporter of corn, and Illinois is the No. 2 producer of the grain behind Iowa.

Bullock referenced the “food versus fuel” tradeoff that comes with using more of the domestic corn crop for ethanol production rather than for livestock feed or exports, resulting in higher food prices.

This practice is hurting low-income consumers in the U.S. and people in developing countries, two extremely price-sensitive groups. World Bank President Robert Zoellick, an American, addressed the issues of food prices and agricultural concerns earlier this spring.

“More poor people are suffering, and more people could become poor because of high and volatile food prices,” Zoellick said in a press release.

The World Bank’s food price index is 36 percent above what it was a year ago. Corn is up 74 percent. Soybeans, which are also used for biodiesel, are up 36 percent.

According to the World Bank, 44 million people have been driven into poverty since last June because of spiking agricultural commodity prices. Another 10 percent increase in prices could force 10 million more people below the $1.25-a-day poverty line.

Relaxing worldwide biofuel mandates, including U.S. ethanol policy, would help alleviate the impact of soaring food prices. With federal energy policies, Bullock said farmers are making hundreds of thousands of dollars in profits and are unlikely to reduce the amount of corn used to make ethanol any time soon. If the Coburn-Feinstein bill passes, however, that may change.