Prices for agricultural products rise, due largely to U.S. ethanol demands

A walk through the grocery aisle tells the tale. Food prices are on the rise.

But why? Several factors are contributing to the increases, but a recent report presented to the U.S. Congress keeps referring to one crop: corn. 

The report, “U.S. Baseline Briefing Book: Projections for agricultural and biofuel markets,” by the University of Missouri’s Food and Agriculture Policy Research Institute, predicts continued rising prices for crops – notably corn and soybeans – as well as for dairy and livestock. 

According to FAPRI policy analyst Pat Westhoff, the increased price of corn has led farmers to shift more of their land away from other crops – mainly soybeans.

“A number of factors come into play,” Westhoff said. “One that everyone has heard about, and one that definitely is key, is biofuels. Growth in the ethanol and biodiesel industries … has pushed up corn demand and corn prices, and higher demand for biodiesel has pushed up prices for soybeans as well.”

Much of the demand for ethanol and biofuels comes from government mandates. The Energy Independence and Security Act of 2007 requires 36 billion gallons of “renewable fuels,” meaning ethanol and biodiesel, be sold annually in the U.S. by 2022.

“Effectively, the mandates put a floor under the price of corn because of the demand for ethanol,” Westhoff said, noting that the report predicts petroleum prices will drop from their current historic highs over the next several years. That means the demand for biodiesel probably won’t grow beyond the mandated levels. “But if oil prices stay at $100 a barrel, we might see further expansion of the industry,” he added.

Some farm economists – including Elvin Hollon of Dairy Farmers of America – point to the fact that farmers are increasing their price for other crops in response to the rising price of corn; corn sold for $3.95 per bushel in Missouri in 2007, nearly double the 2005 price, according to the National Agricultural Statistics Service.

Farmers who could be using their land for corn production but choose other crops raise their price to make up the difference between what they are earning and what corn would bring.

Wheat prices also are on the rise – $5.35 per bushel in Missouri, up 60 percent since 2005 – thanks to increased international demand because of recent drought conditions in Australia and Europe.

Livestock

The same drought conditions have increased the international demand for dairy products, too. Nonfat dry milk sold for $1.24 per pound as of March 15, up from 91 cents per pound at the same point in 2005, according to NASS. Figures for Missouri weren’t available.

“The world’s dairy case is getting extra supplies from the U.S.,” Hollon said. “In Europe, dairy production has been strained a little bit. Those areas are major exporters, and they’ve been cut back.”

Gordon Carriker, Christian County agriculture business specialist for University of Missouri Extension, said local dairy farmers are not as heavily affected by corn prices because of the area’s propensity to grow grass.

“Where a conventional dairyman will see his purchased feed cost rise because of corn, if they can get into a grass-based dairy, those operations tend to be doing a lot better than the conventional dairies,” Carriker said.

The cost of livestock production is going up too, Westhoff said; the main culprit is increased cost of production, notably fuel, electricity and feed.

“Pork is the extreme case – we expect hog producers to lose money in 2008, given projected prices for hogs and projected costs of inputs,” he said. “Cow-calf operators may not lose money this year, but they won’t make anywhere near the money they were making up until a few years ago.”

Carriker said livestock farmers also face changing purchase patterns by local feed barns, which historically buy young livestock and feed them a corn-rich diet before sending them off for processing.

“With corn prices where they’re at, feed yards don’t want to have cattle that long,” Carriker said. “They’re willing to spend a little more for cattle that have more age on them and more weight, so they only have to hold onto them for 30 to 60 days. That’s at the expense of producers who have traditionally sold younger animals.”

He noted that ethanol itself may help alleviate rising feed costs, because distillers grains, a byproduct of corn-based ethanol production, can be used to supplement cattle feed.

Consumer impact

The increased costs of farm products are hitting store shelves. The study predicts per capita spending on food consumed in the home will increase nearly 15 percent between 2007 and 2017.

Westhoff notes, however, that final retail food costs are linked to many factors other than commodity prices.

“It’s important to stress that consumer food prices are a function of what happens everywhere between the farm and the consumer. That includes transportation costs, which are up because of higher fuel prices, and increased wages, which make it more expensive to get food to the market,” he said.

Overall, the value of all U.S.-produced agricultural products reached $280 billion in 2007, while the retail value was $790 billion – meaning farm prices are only a portion of the total consumer cost of agricultural products.

“Relative to what farmers get for what they sell, a lot more happens after the product leaves the farm,” Westhoff added.

DFA’s Hollon said that while dairy prices overall have probably topped out, he doesn’t expect much of a decline in 2008 – and the price of milk itself may still rise. A gallon of whole milk in St. Louis or Kansas City sold for $3.89 in March compared to $3.30 in March 2005, according to the U.S. Department of Agriculture. Information for milk prices in Springfield was not included in the USDA report.

“Consumers who buy fluid milk have seen those prices change a little quicker, but I’m not sure all of the milk price increases has reached the retail level yet,” Hollon said.[[In-content Ad]]