The escalating cost of corn can be linked to the price of crude oil, says a University of Iowa agriculture economist.
Bob Babcock told a bioenergy conference in Calgary Nov. 13 that grain prices are now linked to oil and gasoline prices because ethanol is sold into an energy market where price is set by the petroleum industry.
“We are pricing corn off of crude oil,” Babcock said.
“If gasoline is at $2.50 (US per gallon), the willingness to pay for ethanol is fairly high.”
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From a low of nearly $2 per bushel in 2002, corn prices doubled to $4 earlier this year. Nearly half that increase was due to rising ethanol production.
That drove up the cost of livestock feed. It also increased the supply of dried distillers grain, which helped offset high corn prices, but not entirely because DDG prices are tied to corn, Babcock said, meaning livestock producer bears a heavier feed cost no matter what happens.
“If you are a cattle feeder or a hog feeder and you are wondering what the U.S. price of corn is going to be, my best judgment now is if you have $2 gasoline, (corn) is going to be around $3.50,” he said.
The wild card is government subsidies tinkering with the normal curves of supply and demand.
Babcock predicts the U.S. government may limit its 51 cent per gallon ethanol blenders’ tax credit to the first 14 billion gallons produced. That would keep existing plants in business but would probably limit further expansion.
A 10 percent inclusion rate in all gasoline in the U.S. would require 14 billion gallons of ethanol.
He said the cost of grain should eventually come down. As demand and price increase, more is produced until there is enough supply to drive down the price.
“If you want 10 billion bu. of corn produced, $2.50 corn is needed, but to produce 14 billion bu. farmers need to be paid $3.80 to make it profitable,” he said.
“To make 15 billion gallons of ethanol, it (ethanol) needs to be worth $1.60 per gallon.”
Ethanol plants will still operate as long as corn stays below $4.70 per bu. If corn goes beyond that, the plants will close and excess corn will be exported.
The increased demand from ethanol and subsequent strong prices encouraged farmers to plant more corn last spring.
“Farmers will produce a lot more if you give them a price incentive and they’ll do it all within a crop year,” he said.
U.S. farmers planted 93.6 million acres of corn last spring, producing a little more than 13 billion bu.
