U.S. Corn Crop Could Decrease by 10% Further Fueling the Great Ethanol Debate

By Jason Simpkins
Associate Editor

U.S. farmers will produce 10% less corn this year than they did a year ago, driving demand to a 13-year low and further enflaming global rhetoric aimed at diversion of the staple crop for use in biofuels.

Corn production will fall to 11.735 bushels compared with last year's crop of 13.074 billion, Bloomberg News reported, citing a report from the U.S. Department of Agriculture.

About 89% of the corn crop had emerged from the ground as of June 8, and only 60% of the crop was in good or excellent condition. At this time last year, 98% of the corn crop was ready for harvest and 77% was found to be in good or excellent condition.

Next year's harvest is expected to be even worse, as cold, wet weather delayed planting in the Midwest.

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"We need sun," Christian Mayer, a broker and market analyst for Northstar Commodity Investments LLC, told Bloomberg. "The corn needs time to develop a better root system" to improve yields.

As a result, the USDA cut its yield forecast for this next year's crop by 3.2% from 153.9 to 148.9 bushels an acre. This year's crop is expected to yield 151.1 bushels per acre.

Farmers have also switched from planting corn to crops such as soybeans and wheat, which have proved more profitable. In the Prospective Plantings report, released March 30, the USDA said farmers would plant 8% fewer acres of corn in 2008. Producers are on pace to plant 86 million acres of corn this year, 7.6 million acres less than 2007. Meanwhile soybean acreage is expected to jump 18%, to 74.8 million acres this year.

The USDA expects corn inventories will drop to 673 million bushels come August 31, 2009, the lowest level in more than a decade.

A Global Epidemic

Diminishing supplies couldn't come at a worse time, as food prices are skyrocketing alongside demand worldwide. Global corn consumption is expected to rise to 793.1 million tons in 2009, up from a record 778.9 million tons this year. Stockpiles are expected to fall to just 103.3 million tons next year.

Growing populations and wealthier nations have resulted in a massive upswing in food demand. Farmers have struggled to keep up and prices have skyrocketed. Corn prices, for instance, have surged 73% in the past year, hitting a record $6.73 a bushel in Chicago Monday.

According to the World Bank, worldwide food prices have risen a scorching 83% over the past three years. And the president of the World Bank, Robert B. Zoellick, estimates that the spike in food prices could push 100 million people in low-income countries deeper into poverty, as food costs cut into already meager earnings.

Rising prices have already caused rioting in Cameroon, Egypt, Indonesia, Mozambique, Senegal, Haiti and others. They've also translated into a $755 million shortfall in U.N.'s World Food Programme (WFP) budget, a gap U.N. Secretary General Ban Ki-moon insists must be closed as soon as possible.

The U.N. has assembled a task force in response to the problem and a special three-day summit was called from June 2 to June 4.

Hosted by the U.N.'s Food and Agriculture Organization (FAO) in Rome, leaders from 40 nations and representatives from 183 countries met to address the growing world food shortage. On June 3, the group announced that an additional $20 billion would be needed each year to combat global hunger.

The Ethanol Backlash

While the weak dollar, high energy prices, and developing economies have all taken their turns as global scapegoat for soaring food prices, nothing has taken more heat than the practice of diverting food for use in biofuels.

American farmers account for about 42% of the world's corn production, and the fact that corn comes from the Midwest rather than the Mideast makes it a very popular alternative energy candidate, particularly with oil prices upwards of $135 a barrel.

The number of ethanol plants in the United States 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.

But what started out as an environmentally friendly way to reduce America's dependence on foreign oil and pacify a powerful agricultural lobby has become a global liability with foreign nation's lining up to take shots.

"Nobody understands how $11 to $12 billion dollar a year subsidies in 2006 and protective tariff polices have had the effect of diverting 100 million metric tons of cereals from human consumption, mostly to satisfy a thirst for fuel for vehicles," Jacques Diouf, director general of the FAO and the summit's host, said referring to the annual cost of U.S. subsidies to produce ethanol from corn.

However, nations like Brazil, which has a booming ethanol industry based on sugar cane, fired back.

"It offends me to see fingers pointed against clean energy from biofuels, fingers soiled with oil and coal," Brazilian President Luiz Inacio Lula da Silva said.

"Biofuels are not the villain menacing food security in poor countries."

The current U.S. administration continued to assert that ethanol production accounts for only 3% of the overall increase in global food prices. However, other sources including the American Farm Bureau Federation put the figure closer to 30%.

Ultimately, after three days of squabbling, the UN's final declaration did absolutely nothing to halt, even slow, the rise of the biofuels industry. But it's likely the debate will continue as the overall cost of food is predicted to jump 3% to 4% this year. On average, food prices increase about 2.5% annually.

News and Related Story Links:

  • LA Times:
    World leaders urged to address food crisis
  • Money Morning:
    It Takes a Task Force: The U.N.'s Latest Attempt to Feed the Planet