10 August 2012

Graphs of the Day: Why is Corn so Expensive?

UPDATE VIA TWEET:
The graph above comes from USDA data displayed on this DOE website. It shows US corn production and also the amount devoted to ethanol production. USDA currently forecasts 2012 corn production at 10.8 billion bushels, the lowest since 2006.

However, due to government polciies increasing amounts of corn are diverted to ethanol production. The graph below simply shows the difference between the two curves above.
For 2012, if ethanol production were to occur at 2011 levels, then net corn production would drop to 5.8 billion bushels, the lowest since at least 1993. Without the ethanol mandate this year, US corn production would be at an all time high.

Why is corn so expensive? The answer does not seem difficult to understand.

30 comments:

  1. Turning high quality foodstuffs into second rate motor fuel is just nuts. However, as I learned long ago in government service, "Just because it is ridiculous doesn't mean its not right."

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  2. I'm not sure that explanation washes - if it's right, why have wheat prices increased so much (nearly 50%?) in the past year?

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  3. Do you really think that that is a fair comparison? If there wasn't a demand for ethanol in 2012, would as much corn have been planted this year? Surely anticipated demand for corn is a factor in how much gets planted. And surely the drought is a big factor in how much of what gets planted gets harvested. That doesn't seem difficult to understand.

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  4. -3-Andy S

    Thanks. No doubt that ethanol demand impacts supply. The trend in production was 20% greater in 2001-2011 than 1987-2000.

    That said, a decision to waive the ethanol program in 2012 has nothing to do with that history.

    The graph shows that net corn production grew 1987-2000 and declined 2001 to 2011 (and 2012). That suggests that corn production has not kept pace with the demands placed on it by the ethanol mandate. Higher prices result.

    Thanks!

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  5. -2-Tom

    Thanks, wheat is a substitute for corn:

    http://www.agriculture.com/markets/analysis/wheat/wheat-follows-cn-higherrich-nelson_11-ar17587

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  6. ==>> However, due to government polciies increasing amounts of corn are diverted to ethanol production. <<==

    Seems like since @2009, the % diverted to ethanol production has been flat. Have prices increased during that period of time?

    Looks like for the bulk of the time period represented in the top graph (1987-2002), total production increased while the % that was diverted to ethanol was pretty flat. Did prices increase during that time period?

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  7. -6-Joshua

    Here is a price chart -- generally down to 2000, generally up since then:

    http://inflationdata.com/inflation/images/charts/Corn/corn_inflation_chart.htm

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  8. I am confused by that top chart.

    It shows that since @2009, the % devoted to ethanol has been pretty much flat relative to total production.

    However, the bottom chart suggest the opposite by showing a drop in net production - although the drop in net production could be explained if both total and amount directed towards ethanol dropped (thus meaning that the % stayed the same but in absolute terms, the # of net bushes reduced) -- but then I find this chart:

    http://earlywarn.blogspot.com/2011/02/us-ethanol-production.html

    It stops at 2010...but still...

    This article (an interesting topic given your post) says that 42% will be directed towards ethanol production.

    What was the actual % in previous years?

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  9. Sorry - I forgot the link:

    http://www.bloomberg.com/news/2012-08-10/ethanol-output-to-fall-with-corn-at-10-morgan-stanley-says-1-.html

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  10. - 7 - Roger.

    Do you think that price chart supports an argument that ethanol production is the primary variable affecting change in the price of corn?

    Looks to me like the rate of change in corn directed towards ethanol does not track particularly well with price. Look at the inflation adjusted price in 2010 compared to 2006, and then look at the change in amount of corn for ethanol in those years.

    Does the price correlate with corn raised for ethanol any better than it does with the amount of corn raised for food (notice the price jump in 2008, and the jump in corn used for food in 2008?:

    http://ethanol.typepad.com/.a/6a00e553cd9c8588340148c80997ef970c-popup

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  11. Do you think that price chart supports an argument that ethanol production is the primary variable affecting change in the price of corn?

    That's certainly the prevailing wisdom around here. But what do Nebraska corn farmers know about the price of corn?

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  12. For 2012, if ethanol production were to occur at 2011 levels, then net corn production would drop to 5.8 billion bushels

    The renewable fuel standard mandates 13.6 billion gallons of ethanol be used in 2012.

    http://www.businessweek.com/news/2012-08-07/twenty-five-u-dot-s-dot-senators-ask-epa-to-adjust-ethanol-mandate

    Ethanol production pretty closely mirrors the mandate.
    http://www.ethanolrfa.org/pages/statistics/

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  13. Do you think that price chart supports an argument that ethanol production is the primary variable affecting change in the price of corn?

    I would suggest that weather is the primary variable affecting short term changes in the price. The reduction in crop due to corn-to-ethanol can be a long-term driver underneath that.

    A similar relationship is used to "prove" that CO2 is causing warming underneath the fluctuations of weather.

    I find it intriguing that some people are worried that the CO2 will lead to imminent catastrophic warming, yet with similar evidence cannot see that the corn-to-ethanol "solution" is much more likely to end badly (given that we understand the relationship between supply and demand rather better than the relationship between GHG and climate).

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  14. - 11 - Right Wing Professor -

    I'm sure that the farmers of Nebraska appreciate you speaking for them, and I'm sure that they are very knowledgeable - but I still have some questions.

    According to the charts Roger provided and I've linked: The inflation adjusted price of corn in '06 was 1/3 the price in '96. But the amount of ethanol produced in '06 was three times the amount of ethanol in '96. If the price of corn is a function of the amount of ethanol produced, then how do you explain those data?

    Also,

    The price of corn spiked in 2008. The amount of corn produced for ethanol did not spike in 2008, however, the amount of corn produced for food did spike in 2008. How do you explain those data?

    Thanks!

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  15. Hi Roger,

    I have a question about the data that gets gathered by the USDA and then processed by the DOE. Perhaps there is not a clear answer, but I think it's worth thinking about.

    Are there data that show the relationship between what I'll call 'food grade' corn production and ethanol? Because not all corn is created equal. Only the very best looking, highest sugar content and highest starch content corn will make food for people.

    But pretty much any corn cob can be fermented or processed into other products (plastic, foam, dry wall, etc.). So I wonder if there hasn't been such a large increase in actual amount of corn being grown, but because technology has become more efficient with the corn already there, farmers are wasting less of their crop. This decreased waste then gets conflated with increased production since farmers are finding more avenues to sell their corn.

    Do you know if anyone has looked into this effect in relating corn production and price?

    Thanks.

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  16. - 15 - maxwell -

    This link, I believe, has some information that is relevant to your question - even if it is obviously from a partisan stakeholder:

    http://ethanol.typepad.com/my_weblog/corn/

    In particular this post:

    http://ethanol.typepad.com/my_weblog/2011/01/response-to-the-wsj-ethanol-is-not-reducing-the-amount-of-corn-for-food.html

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  17. If the price of corn is a function of the amount of ethanol produced, then how do you explain those data?

    At some point in your life, you probably learned what a 'function' is. This might be a good time to remind yourself. To take the simplest example, f(x,y) is most definitely a function of x, although it is not exclusively determined by the value of x.

    No number of cases where corn prices are affected by other factors besides ethanol production is sufficient to disprove that corn prices are a function of ethanol production.

    Funny, I expect you would have no problem with the idea that climate is a function of atmospheric CO2, but that the drop in temperatures after Pinatubo was not a a result of atmospheric CO2.

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  18. - 17 - RWP -

    Here is what Roger said:

    ==>> Why is corn so expensive? The answer does not seem difficult to understand. <<==


    IMO, obviously, there are many factors that affect corn prices. Roger's simplistic suggestion that one correlation,over a relatively short period of time, explains causation doesn't fit the data I referenced.

    Please explain the data, RWP.

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  19. The massive increase in ethanol consumption for fuel from 2006 - 2011 (quadrupling) clearly correlates strongly with the near quadrupling in corn futures prices. Yes, there's a dip in 2009-2010. Do you suppose something else was affecting the overall economy 2009-2010? And the recent run up is clearly drought related. But the underlying trend is pretty clear and obvious. Where there is a major added source of demand, and supply problems, prices will rise. This is surely not something you want to debate.

    BTW, in response to your earlier snark, I do happen to grow corn (a small amount); but more importantly I talk to my neighbors, who grow a great deal of corn. Ethanol producers obviously have an enormous economic stake in the maintenance of the fuel mandate, and citing an industry blog in your defense strikes me as real desperation.

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  20. ==>> The massive increase in ethanol consumption for fuel from 2006 - 2011 (quadrupling) clearly correlates strongly with the near quadrupling in corn futures prices. <<==


    Dude! Look at the "trend" in price from 2006-2010 on this chart:

    http://inflationdata.com/inflation/images/charts/Corn/corn_inflation_chart.htm

    So you're going to add one more year and then tell me that the "trend" for a five year period is completely different than the trend that would show if you didn't add that one last year?

    Look at the trend from 1997--2006, a nine-year period, when ethanol production tripled.


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  21. Joshua (#20),

    It's not just the high price in 2011 that gives the upward trend; 2008 contributes also. Granted, prices are volatile, but if you split the difference between adjacent highs and lows there's a clear upward trend since 2006, roughly a doubling in price. That correlates extremely well with the doubling in corn for ethanol production. The flat price (and declining versus inflation) for corn in the previous decade highlights the dramatic price increase all the more. Corn ethanol production during that period may have tripled, but its percentage of the corn crop was too small to affect prices significantly, so that counterargument has no teeth.

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  22. Brian (21)

    Yes - I see all that you say there. But that only exists because you're adding in one, unusual year. If the price should happen to drop next year, the effect you're describing would nearly completely disappear.

    ==>> Corn ethanol production during that period may have tripled, but its percentage of the corn crop was too small to affect prices significantly, so that counterargument has no teeth. <<==

    It is certainly true that corn used for ethanol as compared to corn use for food has grown proportionally, but I don't think enough to explain the cost differential. That ratio grew just as dramatically for the four years from 2006-2010, in fact more so than from 2010-2011, but the price didn't increase at all from 2006-2010 while it jumped dramatically in 2011.

    And the growth in ethanol production also grew dramatically from 1997-2006 without the price changing much at all.

    Perhaps there is some sort of "tipping point" where the % of ethanol as a portion of the overall production causes it to "jump" in influence on price, but it would seem that something of a description of that mechanism would be required to flesh that dynamic out.

    I don't doubt that ethanol production influences price. I don't see support for Roger's attribution of causation because of a correlation that is so variable and inconsistent.

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  23. Joshua (#22),

    The problem with your argument is that you're cherry picking. It's not true that the price didn't increase from 2006 - 2010. You are only comparing 2010 (a low year) with 2006 and ignoring the trend. Some years are high, like 2008 and 2011, and some are low, like 2009 and 2010. The actual trend is between the highs and lows and is certainly extends well above the level of 1997 - 2006.

    I agree with you that causation is hard to argue right now. Corn prices vary too much and the upward trend is only 5 years old. But the data definitely favor the idea that ethanol is having an effect, as opposed to no effect.

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  24. We burned corn for heat in our home for 5 seasons. The first year corn was $1.70 bushel. Our highest heating bill for one month was $70 at that time. I saw the writing on the wall in 2009 when it cost on average over $200/mo, removed the furnace in 2010 and installed a geothermal system.

    He's not cherry picking anything; the charts are reflecting corn production, not prices, but I can attest watching prices rise year after year as subsidies began affecting corn prices even while production rose. When the government dropped the straight subsidies per gallon of ethanol, all they did was instead mandate a minimum IIRC of 39% corn be used for ethanol.

    Corn will likely remain at $8/bushel or above.

    Not only is corn very expensive, so is hay. We've had horses for for 30 years so monitor feed costs very closely. There are places here in Michigan where hay is up to $10/bale. Unheard of in these parts. Our cattle farmer friends are buying round bales and selling their square bales; horses need better quality hay than cows.

    Beef prices are what to watch in the coming year(s).

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  25. ==]] Why is corn so expensive? The answer does not seem difficult to understand. [[==

    Say, Roger - maybe, in the name of being an "honest broker," you might want to update this post?

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  26. -25-Joshua

    Thanks, however had you actually rea THB, you'd be able to use the terminology appropriately;-)

    On corn prices see:
    http://afdc.energy.gov/data/10339

    and

    http://abcnews.go.com/US/wireStory/usda-2013-corn-harvest-record-139b-bushels-20829668

    Those suggest in in 2013 the non-ethanol corn available has rebounded to ~9bb which explains the big drop in prices.

    Hope this helps. Thx.

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  27. --snip--

    Exceptional harvests were found around the country, thanks to adequate rain and cooler temperatures at the time corn pollinated.

    --snip--

    Hmm. They forgot to mention that the main driver was a change in the % of overall production that was used for ethanol.

    Must have been an oversight.

    Or then again, it could be that your previous post employed a simplistic argument about the factors affecting the cost of corn (read the comments on the previous thread).

    Thanks. :-)

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  28. -27-Joshua

    Agreed, over simplified of course but I'll stick with the difference between the ethanol mandate and the overall production as a key factor in price. With the ethanol mandate down and production (way) up, prices have gone down.

    If you think that the ethanol mandate irrelevant to price of corn than we can simply agree to disagree, no worries.

    Last word/snark is your on this, thanks.

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  29. ==]] If you think that the ethanol mandate irrelevant to price of corn than we can simply agree to disagree, no worries. [[==

    No, I don't think it is irrelevant. My point is still as it was...

    ==]] Why is corn so expensive? The answer does not seem difficult to understand. [[==

    None of us benefit from simplistic analysis that reinforces and is easily exploited in the already abundant politicization of complex issues.
    ..

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  30. And seriously, Roger - how do you get from this statement of mine back in the day (immediately above):

    ==]] I don't doubt that ethanol production influences price. [[==

    To your statement today:

    ==]] If you think that the ethanol mandate irrelevant to price of corn than we can simply agree to disagree, no worries. [[==

    That's like the mother of all straw men.

    Also, like I said above:

    ==]] I don't see support for Roger's attribution of causation because of a correlation that is so variable and inconsistent. [[==

    Again, that was my argument before and it remains my argument now. I see it as a positive sign that you seem to have backed down from your previous post - although a more explicit correction might be less suboptimal. :-)

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