Here is an interesting chart illustrating the correlationship between corn prices and corn used in ethanol (also in feed).
The Bloomberg writes,
The portion of this year’s U.S. corn crop going to ethanol may surpass the amount used in feed for the first time. Federal subsidies for ethanol production, due to expire at the end of 2011, have spurred corn demand and pushed up prices, to the dismay of livestock farmers
The chart reveals that rising corn prices have accompanied the expansive growth of corn bushels used as ethanol. In short, usage of corn as food have been diverted to energy.
The question is if this correlation constitutes causation or merely a coincidence.
According to a study, the answer has partly been yes; subsidies to the ethanol industry has been generating additional demand for corn, which consequently has been influencing corn prices.
From the AFP,
US ethanol subsidies pushed up corn prices as much as 17 percent in 2011, according to a study released Wednesday at a time when Washington's policies on biofuels are coming under heightened scrutiny.
The study by Bruce Babcock of Iowa State University and released by the Geneva-based International Centre for Trade and Sustainable Development, suggests that high gasoline prices this year may have intensified demand for ethanol, creating a tighter market for maize than in previous years.
To see how relevant this relationship has been. Corn prices recently tumbled. Apparently, the collapse has been coincidental or timed with the elimination of subsidies for the ethanol industry.
According to the Reuters last June 16th,
The Senate voted overwhelmingly on Thursday to eliminate billions of dollars in support for the U.S. ethanol industry, sending a strong message that the era of big taxpayer support for biofuels is ending.
The 73-27 vote may ultimately be symbolic since the White House has vowed not to repeal ethanol subsidies fully and the bill the repeal language is attached to is not expected to make it into law. But it underscores the growing desperation to find savings in a budget crisis that is forcing both sides of the aisle to consider sacrificing once-sacred government programs.
In my view, this shows that the answer has also partly been a yes. Subsidies have had significant distortive effects on the balance of corn economics which has been reflected on prices.
Although the White House is expected to veto the Senate bill, the corn market probably interprets that these subsidies may not last (subject to the winner of the Presidential elections of 2012).
The recent spate of interventions in the commodity markets may have also influenced the downdraft.
Aside, other factors could also be in play: the Fed’s monetary policies, global monetary policies, global supply and demand balance, (lesser) degree of globalization of agriculture trade among many other variables involved.
The side effect of levitated corn prices from ethanol subsidies has been contributing to a boom in US farmland
According to Douglas French at the Mises.org,
today's Big Ag boom is sponsored by ethanol subsidies from the state. Just as when the federal government told farmers during WWI to grow wheat to win the war, Congress voted to double production of corn-based ethanol "to win Al Gore's war" — and so a third of the US corn crop could be dedicated to making fuel, up from 7 percent in 2001.
David Peligal at Grant's Interest Rate Observer says that if the ethanol subsidy were removed, the price of corn would collapse. Senator Tom Coburn, a Republican from Oklahoma, has put forth just such a bipartisan proposal to end the 45-cent federal tax credit for every gallon of ethanol-blended gasoline.
Farmland prices doubled nationally in the 2000s, to more than $2,300 per acre, according to the US Department of Agriculture, and prices today in soil-rich areas of Iowa and Illinois are more than three times that level. Values for nonirrigated cropland soared by 10 percent or more in 2010 alone in states across the Midwest, according to the Federal Reserve Bank of Kansas City.
Net cash yields cluster around 3.5 percent for corn land in Iowa and wheat land in Kansas. At the height of the 1970s boom the net cash yield was 4.55 percent.
As corn prices have shot upward, so has Iowa farmland, which is selling for $8,500 to $10,000 an acre.
Recently an 80-acre parcel was auctioned in Mitchell County, Iowa, going for $10,000 an acre, or $800,000. But with only 72.2 acres actually tillable, it works out to $11,080 an acre — a country record.
Grant's Interest Rate Observer provides some color to the auction. It turns out the farmers bidding for the ground dropped out at $9,000 an acre and then two investors took it the rest of the way. A gentlemen who attended the auction said it was the slowest he'd ever seen. The last $1,000 was bid up in $25 increments.
In Kansas, with wheat going for $3.25 a bushel, the land is going for $1,500 an acre, double what it was five years ago.
Bottom line: Myriad government interventions have been producing pockets of bubbles in the US and the global economy.
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