Corn Rises for Eighth Straight Month, Pitting Ethanol Use Against Global Hunger

By Mike Caggeso
Associate Editor

Against a backdrop of soaring worldwide food prices, riots over shortages and controversies about food crops being diverted for biofuels, U.S. corn prices jumped another 7% in April, the eighth-straight monthly advance.

And the worst may be yet to come: Despite the rocketing price of corn and calls to step up production of corn-based ethanol, farmers intend to devote a bigger percentage of their acreage to more-profitable crops such as soybeans and wheat.

"Compared with soybeans and wheat, corn is still bullish as people expect the acres in the U.S. will fall following planting delays," Kenji Kobayashi, a grain analyst at Kanetsu Asset Management Co., told Bloomberg News.

The spot price for corn closed at $6.12 a bushel yesterday, having gained more than 7% for the month. Corn futures for September 2008 traded as high as $6.23 a bushel.

Here's the key reason corn prices are popping: Corn planting is expected to drop 8.1% to 86.014 acres in the United States (still the world's largest), according to the U.S. Department of Agriculture. Meanwhile, soybean acreage in the United States is expected to jump by 17.5% to 74.8 million acres, up from 63.6 million acres in 2007. [Please click here to read a related story on how biotech giant Monsanto is helping to battle soaring corn costs in today's issue of Money Morning].

Clean Air vs. Empty Stomachs

With corn prices escalating and increased focus on the environmental hazards of ethanol production, another conversation has entered the fray: using corn set aside for ethanol production to feed those who can't afford to eat in the face of soaring global food prices.

Nearly a quarter of Iowa's corn crops go to its 28 ethanol plants - and more than two dozen more are under construction or being planned, the Washington Post reported.

Nationally, the number of ethanol plants has increased 134, up from 50 in 1999, according to the Renewable Fuels Association.  Ethanol is expected to soon absorb 30% of the nation's domestic corn production.

"As long as you keep that ethanol industry running, grain prices will be high," Bruce Babcock, professor of economics and the director of the Center for Agricultural and Rural Development at Iowa State University, told the Post. "If you didn't have this large growth in ethanol corn, prices would be nowhere near where they are today."

To feed these stomachs, Texas Governor Rick Perry and Sen. Kay Bailey Hutchinson (R- Texas) are lobbying to ease Environmental Protection Agency ethanol mandates.

"At one point, expanding biofuels made sense for America's energy security," she wrote in Investor's Business Daily. "But the recent surge in food prices has forced us to adapt."

Opponents such as the Renewable Fuels Association say surging oil prices, demand for grains and meat, poor harvests around the world and a weakened dollar are to blame for soaring food prices. And that cutting corn from ethanol production will only rob Peter to pay Paul.

"The production and use of ethanol, while increasing demand for corn, is not contributing significantly to food price escalation.  It is, however, helping to keep oil prices lower than they might otherwise be," Renewable Fuels Association President Bob Dinneen said in a statement

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