Corn Production 101: Why are corn prices so high?

As I write this post, the current price of corn at my local elevator stands at $6.48 per bushel.  That is a historically high price for corn, why?  In no particular order, here are some observations.

1)  Demand for corn. Look at this chart from Kansas State University showing demand for corn on a steady, even accelerated upward growth pattern for many years.  In particular, note that in the decade of the 1990’s, corn usage grew about 1.5 billion bushels.  In the 2000’s, corn usage grew 4 billion bushels.  In other words, what was already good, solid growth tripled. And demand for corn is strong which is encouraging production.

2)  Stocks, % of use, oh my! These complex concepts are very important when it comes to understanding the price of corn.  This graph shows very clearly, the reason for corn’s price rise.  There will simply be VERY little leftover corn at the end of the 2010 crop year, supplies are so tight that it is the market’s job to continue to push prices high enough to ration what little stocks will be left.  That is why prices for corn today, are higher (in our case about $1 per bushel higher) than prices for fall harvest delivery.  To give a perspective on today’s corn price, this historic yearly average price chart shows that corn has spent most of it’s time under $3, often $2.50 or less.

3)  Ethanol.  Many would argue that ethanol has been the primary factor for the increase in corn prices.  Supply/demand issues, and speculating on the underlying causes of prices rising or falling is a difficult, complex issue.  But I think we overplay the ethanol card often times when trying to understand the reason for the corn price rise.

4)  More importantly, I think the rise of the price of corn can be pinned to a changing global environment, where basic commodities, be it oil, energy, or ag goods have increased value as many developing economies scramble to secure resources in order to feed, clothe, house, and basically provide for their people in the way that I expect to do for my family

5) While I have a generally positive agriculture outook, I’m also well aware that many, many times a new “golden era” of agriculture was dawning, only for the reality of overproduction and low prices to quickly follow.  I well remember the need to “feed China” as recently as the previous spike in prices in 95/96.

What questions do you have about the price of corn?

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9 responses to this post.

  1. I think you nailed it on this post. One thing I think often gets left out when we talk about ethanol is the DDGs produced that feed livestock which in turn feeds people. People that don’t know this likely believe, by default, that any corn going to fuel is lost to the food market.

    Reply

  2. Posted by agchick on March 18, 2011 at 11:44 am

    Darin,

    A couple of points to add to the discussion are these:
    1. As The Farmer’s Life mentions, DDGS are recovered from the process of making ethanol. The portion of the corn kernel that is most valuable for feed is not used in the distillation process. What that means is that 1/3 of the volume of corn that goes to make ethanol is recovered as livestock feed (DDGS).
    2. As a component of world demand, the U.S. ethanol industry only consumes 3% of the world’s coarse grains. That is a small amount overall. So yes, ethanol production does impact price, but not to the extent that other demands on the grains do.
    3. As for stocks, or carryover, we have a startling small amount of corn that is projected to be left at the end of the marketing year. As of Sept 1, based on current usage, we only have an 18 day supply of corn left over in this country. I hope all the corn farmers get out there early, plant lots of corn, and start getting it harvested before Sept 18, 2011!

    Reply

    • And for any farmers reading this, there’s usually some pretty good premiums that exist for getting corn harvested early in environments like this. In 95/96 guys in our area were hauling corn into Nebraska feedlots for $5 per bushel, straight out of the field, wet, when it was worth $3.50 a couple weeks later.

      Reply

  3. Keep in mind when looking at the historic yearly average price chart that those numbers aren’t adjusted for inflation. The 1974 price of $3.02 per bushel would be about the same as $12.99 per bushel when adjusted for inflation to 2009 dollars. In fact all the years from 1972 through 1980 would be above $7.00 per bushel when adjusted for inflation.

    Reply

  4. Interesitng – current corn prices are at 654 cents per bushel

    http://www.cornmarketprice.com

    Reply

  5. Posted by Gerad Coder on December 7, 2011 at 10:24 pm

    I also agree with your post. I feel that we as the United States of America are look upon to help with all crisis around the globe. We have the resources and sometimes stretch them as far as we can for profit and not the good of humanity

    Reply

  6. Posted by Doug on July 13, 2012 at 10:03 pm

    I think you are all so dilusional. You can’t explain tripling prices because of global demand (food) The population hasn’t gone up that much in 4 years. Plus the yields continue to increase every year. The only explanation is ethanol. That is the only thing that can explain it. I am sure there is a graph out there that shows this fact.

    Reply

    • Doug,

      Thanks for stopping by and commenting on my blog. There is certainly a lot happening across the commodity markets. Oil prices ranged $20-$30 per barrel for years, shot to $150, still up around $90. If corn had stayed at the $1.50-$2.00/bushel it was at, all corn farmers would be broke. Or, more realistically, at those price levels, we would have turned corn to ethanol without a subsidy. Also, keep in mind that 1/3 of every bushel of corn for ethanol gets turned directly into a feedstock that is actually has higher feed value than the original corn. Higher corn prices have allowed for lots of investment in seed and other production technologies, which should enable even higher yields in the future.

      I’ll admit I have a somewhat biased view that ethanol has been a net positive for everyone. But I do think an effort to try to understand this rather complex subject certianly shows that there’s far more to the story than the simple “get rid of ethanol, have more food”.

      Thanks again for your thoughts
      Darin

      Reply

  7. Posted by Doug on July 13, 2012 at 10:08 pm

    According to the USDA, ethanol accounts for 40% of the U.S. corn crop (2011). Case closed. Get rid of this crap. It is bankrupting the world. We are burning our food supply.

    Reply

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