U.S. consumers generally see corn-based ethanol as a positive move toward enhancing U.S. energy production as well environmental benefits. What they haven't thought about is the potential for increase food prices.

While they won’t see much change in the price of corn flakes or a package tortillas, but growth in U.S. ethanol production – and its increased corn demand – will push meat, eggs and dairy product prices higher.

“It’s not the food made from corn, it’s food from animals that eat corn that will increase,” says Ron Plain, University of Missouri agricultural economist. “This is a major shift for agriculture. In the past, corn producers have grown food for people and feed for livestock. Now we add fuel to the list. I don’t see us doing that without having a lasting impact on the face of agriculture.”

Crop farmers are enjoying the highest corn prices in more than a decade while livestock and poultry producers are feeling the pinch. Plain said this price increase is unlike others the industry has experienced.

For example, corn prices can jump up in a drought year. “But the next year, we plant a new crop, we harvest that crop, and prices come back down," says Plain. “This new demand scenario isn’t like a drought. It will be sustained before, during and after the crop gets planted and harvested. I see corn trading around $4 per bushel for the foreseeable future.”

During the past century, the average U.S. corn price can be broken into three plateaus. For 35 years before World War II, corn traded for an average price of 76 cents per bushel. That plateau lasted until after the war, when price controls were removed and supply decreased.

That brought the next plateau, when corn averaged $1.26 per bushel until the 1970s. “That’s when an increase in corn exports pushed prices to around $2.37 per bushel," notes Plain, "which is where we’ve been. We’re due for this step up.”

Of course, as more acreage shifts to corn, prices for other commodity crops will increase. Soybean, wheat, cotton and rice prices will rise as corn takes up more of those acres.

As a result, livestock producers – especially those without ready access to distiller’s grain, a protein-rich ethanol byproduct – will 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 drop feeder pigs, Plain notes.

“Higher feed costs put pressure on the livestock industry to cut production,” he adds. “When you consider that we’ve pushed corn prices up 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 grocery prices.

“Ethanol and inflation will raise prices for meat, eggs, milk, cheese and other dairy products about 12 percent by 2009,” he says. “I don’t expect consumers to reduce meat and dairy consumption much because of the increase, however.”

Another concern is the willingness of foreign customers to pay more for U.S. corn, notes Plain.

“The real winners are the owners of land that can grow corn because land values will continue to increase,” he adds. “It’s not good news for the large livestock producers such as Tyson and Smithfield. It’s going to be tough for the next couple of years.”

Source: University of Missouri