The increase in corn demand due to ethanol is rising faster than growth in corn yields per acre, and sets up tight corn supply and demand scenarios in the future, says Keith Collins, former chief economist for the U.S. Dept. of Agriculture in a economic analysis Monday.
Collins wrote the analysis, The Role of Biofuels and Other Factors in Increasing Farm and Food Prices, as an economic advisor for Kraft Foods. He also submitted the paper to the Environmental Protection Agency as part of its request for comments regarding Texas' renewable fuels standard waiver request.
"So long as that situation continues, corn will have to attract acreage from other crops to meet its expanding demand. This shift will mean higher prices for all crops that compete, directly or indirectly, for acreage with corn," he said. The market projects a continually tight corn supply and demand balance for the next several years, evidenced in current high cash prices and futures prices for the next several years.
Collins' paper reviews various studies that have examined the relationship between corn used in ethanol production and corn prices. They suggest increased corn demand for ethanol could account for 25 to 50% of the corn price increase expected from 2006/07 to 2008/09. Another analysis presented in the paper suggests that ethanol could account for 60% of the expected increase in corn prices between 2006/07 and 2008/09 when market demand and supply are inelastic with respect to price--i.e., a period when stocks are very low, feed use is slow to respond, export demand is strong due to foreign agricultural policies, and acreage is very constrained.