Sunday, October 14, 2012

No Cornmageddon After All

It is not to soon to look back at the dire predictions from this year’s drought in central North America. In August, it was not hard to find experts to say that the U.S. corn crop had been decimated; that food prices would double; that by 2013, there would be food riots worldwide.

None of that will happen. After all the fuss, the United States as a whole is turning in a near-normal corn crop. Yields in Iowa are now projected to be down about one sixth from last year, remembering that last year was a pretty good year. Yields in the Ohio Valley are down by a third, but even that is within the normal variation for a field of grain. Minnesota is actually doing better than it did in last year’s floods.

Corn prices are higher but I can’t find any indication that beef and pork herds (that’s where most of the corn goes) have gotten much smaller. Prices for beef and pork will surely be higher throughout next year, but not enough to create sticker shock for supermarket shoppers. It is important to remember that meat prices had been trending higher already before last year, so the latest increases are really nothing new or surprising. Meanwhile, for corn growers, the current high prices for corn take away some of the financial impact of the low crop yields. U.S. corn is still in a surplus position, according to USDA, though the surplus is a third of the usual amount and may vanish completely before next summer.

Even my own worries turned out to be exaggerated. If this summer’s weather is an indication of what we can expect in the future after the Arctic sea ice is gone, farmers will still be able to grow corn in the central United States. It might not be quite as lucrative as before, but farmers can reduce the impact of a drier climate by picking a corn variety better suited to the new climate.

The financial consequences for producers are more important than the effect on consumers. Beef and pork producers are being squeezed and may barely break even for the next eight months or so. The squeeze extends to restaurants, which were already being affected by rising meat prices. Some restaurants have already closed this fall, complaining of high prices for beef. Others are shifting their menus around, taking most of the corn-heavy products off the menu.

The consequences for ethanol plants are similar; they operate on very thin margins in good times and some have been idled as they wait for lower corn prices (or higher fuel prices) in the future. Yet if this is a disappointment for the plant owners, it makes good economic sense. Corn ethanol plants probably should operate mainly in years when there is an excess crop. In those years, they can help absorb the excess production, which otherwise (in extreme cases) might go unused. That reduces the risk of low prices that growers face in high-yield years. For now, the reduced ethanol supply will put upward pressure on gasoline prices.