More than 40% of this year’s US corn harvest, about 5.05 billion bushels, is expected to be used to produce ethanol. That surpasses an estimated 5 billion bushels that will be used for livestock feed. This is the first time more corn has been used to produce ethanol than to feed cattle, pigs, and chickens.

At the same time that the US Department of Agriculture released these figures, the Renewable Fuels Association released the results of study that it commissioned which the RFA claims refutes the “canard” that corn-ethanol production is driving up the cost of corn consumed by people.  One has to wonder at the timing of the two announcements.

Corn prices are about 90% higher than they were a year ago amid demand from ethanol producers like Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), Pacific Ethanol, Inc. (NASDAQ: PEIX), Great Plains Renewable Energy, Inc. (NASDAQ: GPRE) and POET LLC. But demand for corn has also risen world-wide, as developing countries continue economic growth and demand for meat by consumers also grows. More meat, more feed for livestock.

How much of the price of corn is attributable to the US-mandated demand for ethanol is certainly arguable. The RFA-commissioned report states as its first key finding that “statistical evidence does not support a conclusion that the growth in the ethanol industry is driving consumer food prices higher.”

The report attributes the rise in corn prices for this year to other causes: “The price increase in 2010/11 is largely a combination of strong export demand, unfavorable August [2010] weather, and a run-up in petroleum prices that increase production costs and soybean prices, for [sic] which corn competes with for acreage.”

There is certainly some truth to that. The UN Food and Agriculture Organization recently projected that China, the world’s second largest consumer of corn, would more than double imports this year in an effort to build stockpiles and help ward off the effects of inflation. The FAO expects China to buy 5 million metric tons of corn this year, up from around 2 million metric tons last year. China’s record year for imports was 1995, when it bought 4.3 million metric tons.

It nearly defies belief that government-mandated, and subsidized, consumption of corn has little to no effect on corn prices. Would ethanol production be approaching 14 billion gallons annually without the mandates and subsidies? Not likely.

The RFA would have us believe that mandated demand for more than 5 billion bushels of US corn has only a negligible impact on prices. That’s not the way supply and demand works.

Paul Ausick

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.