Corn Prices Cut Use

Who can afford corn? Almost no one, Purdue economist says.

Published on: Jul 2, 2008

Inexpensive and abundant corn helped move the ethanol industry onto the alternative fuels fast lane. With corn prices now at record highs, demand outpacing supply and crop losses inevitable with the Midwest floods, ethanol production could soon be stalled.

As corn prices continue climbing, fewer ethanol producers can afford the feedstock, says Chris Hurt. In turn, domestic livestock producers and foreign buyers are finding it more difficult either to pay the high prices or obtain the grain they need.

"The ethanol industry is struggling to pay for corn that has reached the $7 a bushel level," Hurt says. "So the ethanol industry may also experience losses and might not be able to bid the price. That will depend on what oil prices and, therefore, ethanol prices, are.

"Everybody is trying to evaluate how many bushels of corn we have lost because of weather-related damage, what the implications are for prices and who can pay these high prices. The answer today is that hardly anyone can pay these kinds of prices and still have positive margins."

Before planting even started this spring, prospects dimmed for a corn crop approaching the 2007 record of 13.1 billion bushels. In March the U.S. Department of Agriculture projected farmers would plant 86 million acres of corn nationwide - an 8 percent decrease from this past year. Following a wet early spring that delayed planting in some states and then this month's devastating floods, the USDA adjusted its harvest estimate to 76 million acres and production to 11.7 billion bushels.

Using a similar 1993 Midwest flood as a model, Hurt estimated U.S. corn production could drop below 11 billion bushels this year. That's not nearly enough corn to go around, he said.

For starters, the U.S. ethanol industry needs 4 billion bushels of corn this year - or 1 billion bushels more than 2007 - to meet anticipated production, Hurt said. Also, livestock producers used 6.15 billion bushels and foreign buyers 2.45 billion bushels of U.S. corn in 2007, and both could buy at least that much corn this year if it were available and more favorably priced, Hurt said.

Usage will have to come down, likely in the livestock and foreign sectors, Hurt said.
"The USDA has said that if the ethanol industry gets 1 billion more bushels of corn it means that the domestic livestock industry will have to cut back 16% in feeding corn," he said. "And then our foreign buyers will have to cut back 18%."