Is Corn Meant for Food or Fuel?

 

by Dan Schafer

This spring in North America, farmers scrambled to plant corn (maize). In the U.S. they were projected to plant 90,500,000 acres (36,200,000 hectares) in corn. That compares with 78,000,000 (31,200,000 hectares) in 2006. They are chasing a market price that went from about US$2.50 per bushel (about US$100 per metric ton) in the spring of 2006 to close to $4.00 per bushel (nearly $160 per metric ton) when it peaked in December 2006 and January 2007.  Though the price has since retreated some, it still looks wonderful to the corn farmer who has often struggled to break even on his crop.

 

At first glance to a farm boy like this writer, the rush to plant corn has the look of so many lemmings running toward a cliff. Experience shows that virtually every time there is a price spike in a commodity, the rush to get in creates an over supply, which knocks the bottom out of the market again. Common sense would suggest planting soybeans or alfalfa or some other crop instead of corn, because the massive shift of land to corn suggests the supply of other crops will be down, buoying up their price.

 

Or am I missing something? Is there something different now? What made the price of corn go up? All the analysts agree that although the 2006 US corn crop was slightly down, the main factor is the demand by ethanol manufacturers for corn. Ethanol plants are now dotted all over the US Midwest. The state of Iowa alone has 27 plants with 30 more either under construction or in the planning stage. In May 2007, I was driving in southern Minnesota.  Five miles from my little hometown we came to an even smaller town called Welcome, MN (population 727).  Here a massive, high security construction project--a new ethanol plant right among the farmers being put up by Vera Sun Energy. There among the cornfields it stood out quite plainly that something was happening to rural Midwest USA.

 

 

 

 

But why would seemingly sound, well managed, well informed companies launch out with so much capital investment in something like Ethanol manufacturing? Isn’t this misplaced optimism? The bottom line answer is that the U.S. government has made a commitment to get the country using biofuels. By the year 2017 the aim is to produce 35 billion gallons (131 billion litres) per year.

 

Tortillas Better Investment than Gold?

But this sudden boon for corn farmers has also raised voices all around the world, alarmed that food crops are being consumed for energy. Most of us in the developed world haven’t noticed a significant rise in the price of corn flakes, or for that matter most other foods. But by January of 2007 the price of corn-made tortillas in Mexico had more than doubled in cost from a year earlier. The media widely blamed the demand for corn by the ethanol industry for inflating the price of poor Mexicans’ staple diet. The din that developed encouraged more critics to weigh in on what is seen as a questionable net benefit of using corn to make ethanol.

 

World Famine?

So, where is this going? Is the world going to be facing food shortages, starting with the least well off? Has the popularised effort to become energy independent suddenly made a wrong turn? The critics’ point has some legitimacy if American energy policy is directly hurting the not-so-well-off south of the border. Also there is some substance to the argument that corn is not the most efficient feedstock for ethanol. But as usual, the seriousness of an issue cannot be measured by the loudness of the clatter.

 

Scepticism of Government Meddling in the Market

Maintaining a healthy scepticism of the wisdom of government policy that interferes with the free market place is always a good safeguard to keep in place when evaluating a direction being taken. We will continue to apply this scepticism to a discussion of American policy a little further in this article. But in fact, the Mexican tortilla crisis had more to do with muddled Mexican government policy for white corn than the ethanol demand for yellow corn. Prohibitive duties that made it virtually impossible to import corn allowed monopolistic food supply firms in Mexico to hoard the supply of white corn that is used to make tortillas. A higher demand for American yellow corn for ethanol possibly had something of a catalytic influence to spark those firms to begin to speculate in white corn, but white corn already was in short supply because of a poor 2006 Mexican harvest. Since the two different kinds of corn have two different markets and two different market-pricing structures, ethanol demand was only unfortunately coincidental with other more significant reasons for the tortilla crisis.

 

Still maintaining that axiom of scepticism about interfering government policy one must acknowledge that economics and politics are bound to be a bit entangled and the more so as the world gets smaller, and that we may need to put up with some interference. The overall political aim of reducing developed countries’ economic dependence on volatile parts of the world is basically sound. And it makes practical sense to invest more of our resources in developing alternative sources of energy, technologically and practically in the market place, than to invest (or squander, as it may be) resources militarily to secure the old sources. It is particularly sensible when that military option often results in the squandering of international political capital and moral high ground.

 

Since Europe and much of the rest of the world are well ahead of the Americas in the use of fuel-efficient vehicles it seems sensible here to focus on the Americas. The reasons Americans lag could be a combination of factors like travelling distances, political independence, economic freedom or a world-outlook deficiency. But whatever the reasons are, any government is the product of the people that elect it, and any government policy can only with great difficulty rise beyond the vision of the general populace. Therefore, the present U.S. energy policy with its emphasis on ethanol made from American crops may be a lot less than ideal, but nearly the best that the American people would be willing to buy into.

 

US Ethanol Policy Worthwhile

In fact, it is not without its worth. If American drivers start getting into the habit of filling up with E10 or E15, or even E85 (10%, 15%, or 85% respectively, of ethanol mixed with gasoline or petrol) a pattern and way of thinking starts developing. The distribution channels get put in place. Outlets providing ethanol become more common. Then drivers with that way of thinking will undoubtedly respond with even greater enthusiasm when more efficient sources of ethanol, making use of that infrastructure, result in an even more economical fuel to put in their car.

 

Higher Crop Prices Hurt the Poor?

To put to rest even more soundly the myth that higher demand for food crops will cause the poor to suffer, we need to express again here that it is just the opposite that is true. There is no question that one of the greatest obstacles to improving world trade is the stubbornness of developed countries on the issue of reducing their market-distorting subsidies to their farmers. Therefore higher market prices for crops could be just the way out for those governments to concede this point. Their farmers could finally stand on their own two feet without government help because their crop is really worth something in the market place. Further, why is it that developing countries push for really free trade in agricultural products? Simple. Their economies are dependent on agriculture because so much of their population is involved in it. Far from causing the poor to suffer, decent prices for crops means at least the rural poor begin to have a market and a fair price for the work of their hands. And prospering farmers begin to contribute to the rest of the economy, creating more jobs and more wealth in a benevolent cycle.

 

There is a way forward. Our intellectualised and idealised way is often far narrower than the obvious way before us. We need a vision. But we also need big enough hearts to embrace practical realities and others' concerns.

 

Thou bringest all again; with Thee

Is light is space, is breadth and room

For each thing fair, beloved and free,

To have its hour of life and bloom.

 

Thy reign eternal will not cease;

Thy years are sure, and glad, and slow;

Within Thy mighty world of peace

The humblest flower hath leave to blow.

            (Dora Greenwell, 1821-82)

 

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