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Growth of ethanol industry pushes corn to new plateau

Consumers won't see much change in the price of a box of corn flakes or a package of corn tortillas, but growth in U.S. ethanol production — and its increased demand for corn — will push the price of meat, eggs and dairy products higher, a University of Missouri economist said.

“It's not the food made from corn, it's the food from animals that eat corn that will increase,” said Ron Plain, MU professor of agricultural economics.

“This is a major shift for agriculture. In the past, corn producers have grown food for people and feed for livestock. And now we add fuel for our cars to the list. I don't see us doing that without having a lasting impact on the face of agriculture.”

With corn currently trading around $4 per bushel, crop farmers are enjoying the highest corn prices in more than a decade while livestock producers are feeling the pinch of higher feed costs for their cattle, hogs and poultry. Plain said this most recent price increase is unlike others the industry has experienced.

“In the past, for example, we've seen the corn price go up in a drought year,” he said.

“But the next year, we plant a new crop, we harvest that crop, and prices come back down.

“This new demand for corn for ethanol production isn't like a drought. This demand will be sustained before, during and after the crop gets planted and harvested. I know it's bullish, but I see corn trading around $4 per bushel for the foreseeable future.”

Plain explained that during the past century, the average U.S. corn price can be broken into three price plateaus. For 35 years before World War II, corn traded for an average price of 76 cents per bushel.

This price plateau lasted until after the war, when price controls were removed and supply decreased.

“That ushered in the next plateau, and corn traded at an average of $1.26 per bushel until the 1970s,” Plain said.

“That's when an increase in corn exports pushed the price to the next plateau of around $2.37 per bushel, which is where we've been until now. We're due for this step up.”

Even with this year's anticipated increases in planted corn acreage across the Midwest — Plain predicts Missouri could be up by as many as a half-million corn acres — the continued ramp-up of ethanol production will keep corn prices around $4 per bushel.

Plain said as more acreage shifts to corn, prices for other commodity crops would increase.

“Prices for soybeans, wheat, cotton and rice will go up as we plant more and more acres out of those crops and into corn,” he said.

As a result, livestock producers — especially those without ready access to distiller's grain, a protein-rich ethanol byproduct — will continue to pay more for feed.

For every dime increase in the corn price, there is a $5 per head drop in the price feedlot operators are willing to pay for feeder cattle and a $2 per head decrease for feeder pigs, Plain said.

“Higher feed costs put pressure on the livestock industry to cut production,” he said. “When you consider that we've pushed up the price of corn by 16 dimes, that's $80 less per head for the cow-calf operator.”

Plain expects U.S. cattle, swine and poultry inventories to shrink, resulting in higher prices at the local grocery store.

“I would argue that ethanol and inflation will raise the prices for meat, eggs, milk, cheese and other dairy products around 12 percent by 2009,” he said.

“I don't expect consumers to reduce meat and dairy consumption much because of the increase, however.”

Of larger concern is the willingness of foreign customers to pay more for U.S. corn, he said.

“The real winners are the owners of land that can grow corn because land values will continue to increase,” Plain said. “It's not good news for the big corporate livestock producers such as Tyson and Smithfield.

“It's going to be tough for the next couple of years.”

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