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Features and Interviews
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Written by HardAssetsInvestor.com
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Wednesday, 09 May 2007 15:00 |
 With
over 3500 uses for corn, corn is everywhere, including places you'd
never thing of. Oh, of course it's in the food we eat: from our chips
to our soda to our package of pre-cut lettuce. It's in the crayons the
kids draw on the walls with, the gypsum boards that make up those
walls, and the wallpaper we cover them with. (More uses? How about a
corn based earth friendly deicer for our roads?)
Given that
modern day life is just bursting with corn, how will the ethanol boom
affect the rest of our lives? Is the demand for ethanol going to
increase our cost of living? Or will the supply keep up and keep things
on an even keel?
According To The Experts ...
The
most obvious inflationary aspect of any ethanol boom would be a rising
price for food. But if you listen to the National Association of Corn
Growers (NACG), the ethanol boom isn't going to impact the price of
food in any substantial way. In a NACG-funded study, investigators
considered three scenarios:
• Corn prices fall from the $4.00/bushel levels of today back down towards the more traditional $2.75 - $3.00 per bushel range.
• Corn prices drop and then hold at $3.00 to $3.50 per bushel; and,
• Corn prices remain high in the $3.50 - $4.00 range.
In
the first scenario, the NACG states that would be little or no impact
on consumer food prices. The second scenario might result in slight
increases for certain food items, but that “would likely be
unnoticeable to the consumer.” Only when the price per bushel stays in
the $3.50 - $4.00 do they find that “consumers could experience a minor
increase in retail prices for some grocery items,” though they propose
that it would be “trivial.”
Can that possibly be right? Won’t
the price of corn flow straight through to the end-users … that is, all
of us munching on Coco-Pops in our morning breakfast?
Well, it’s
not so certain. Cash corn prices are up nearly double since January
2006, but according to the Bureau of Labor Statistics (BLS), the prices
for most meat, dairy and other common products haven't budged. Maybe we
can have our ethanol and eat it too…
According To The Other Experts ...
Maybe,
you’re thinking, that the NACG isn’t exactly the most impartial judge.
Maybe the good old US Department of Agriculture would have a different
idea.
Well, they do: in the self-same study, the NACG cites a
USDA quote saying, “Consumer prices for red meats, poultry and eggs
[will] exceed the general inflation rate in 2008-10 as the livestock
sector adjusts to higher feed costs due to the expansion in corn-based
ethanol production. As a result, overall retail food prices [may] rise
faster than the general inflation rate in those years.”
So, which is it? No impact? A “trivial” impact? Or a doubling of our grocery bills?
Here
is a look at the USDA’s numbers. Looking ahead to 2009, if we peg corn
at $3.50 (the middle scenario for the NACG), the USDA predicts a 40
cent difference in pork shop price (roughly a 10% increase), a 52 cent
difference in the price of a gallon of milk (15% increase) and 24 cent
increase (20%) in the price of eggs.
Trivial? A recent report
from the UDSA stated that there has been almost a 48 percent rise in
the price of wholesale eggs due to higher cost of corn and soybean
meal.
Where's The Beef?
The biggest food-based
impact of corn, paradoxically, will be felt in the meat business …
since meat is really just a pricey way to convert corn into protein.
So,
if you're a meat ranger, how do (or can) you respond when the feed gets
a wee bit pricey? The first order of business is to stop feeding the
cows grain. Pasture and range grazing isn't only cheaper, it can also
be a marketing advantage. As long as Mother Nature cooperates, there is
a little room to change the animals’ diets: just keep them in pasture
longer and spend less time “finishing them off” in the feed lots.
And
if feed prices get really high? Meat producers can respond by sending
lower weight animals to slaughter and/or decreasing their herds or
flocks, thereby tightening the supply and sending up the price of meat.
In sum, there is some wiggle room before the price of lean hogs
and cattle gets too crazy, but it's a classic tipping point problem:
once feed prices cross an unknown threshold level (one that will be
different for each rancher), they'll simply scale back their production
to a level they can support.
When that happens, it could get ugly.
Grains' Response
There
are two relief valves to the short-term pressure on corn supply: wiggle
room in the demand side, and wiggle room on the supply side.
With
limited farmland, the supply slack isn’t huge. We all saw the massive
jump in corn plantings this year, but it’s not so easy. Much of the
reported increase came from marginal farmland – you know, that odd
piece of land on the fringes; the land the farmers don't bother to
plant when prices are lower because it has lower crop yields and/or it
is more labor intensive. The rest comes from other crops. Farmers can
seasonally play a “robbing Peter to pay Paul” game, hoping they get
ahead of their neighbors and harvest while prices stay high, or harvest
enough to make good on their futures contracts. More corn means less of
something else: in this case soybeans (11 percent lower), cotton (down
20 percent) and wheat (7 percent decline).
Where Do We Go From Here?
What does it all mean? Perhaps something as simple as lower supplies and somewhat higher prices.
Nowhere
in the market is Economics 101 more cleanly demonstrated than in the
current battle for corn. Corn has made a shift: it's not only a food
crop; it is now an energy crop. This change in dynamic introduces new
aspects of volatility unfamiliar to grain producers. And as wheat and
soybeans are also available as ethanol ingredients, the way we, as
market players look at grain as a classification, not just a product,
is changing, and the market will be changing accordingly.
This
new volatility creates opportunity. The changes occurring in soft
commodities right now --- a change from food to energy --- is no Tulip
bubble; there has been a fundamental shift and an opening of a major
new market. Assuming that oil prices remain high,
Investors
who maintain a focus on the big picture stand to do very well. Put in
the simplest of terms, demand has shifted, and is shifting, from
petroleum to grain.
So here's all you have to figure out:
- Is the price of oil likely to drop because of the increase in ethanol? (Our guess? Not so much.)
- Is
the price of grain, writ large, likely to set at a higher equilibrium
point for a given level of supply? Almost by definition.
- Will supply adequately (or excessively) compensate for the new demand?
That
last one is the sticky wicket. There’s just no way to gauge where the
supply/demand will balance out; that’s the one you have to decide.
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I Have a Good idea,lets eat the corn ourself and stop killing animals