Easing Ethanol Mandates and Opening the CRP- Possible Solutions to High Cron and Soybean Prices

Implications: There are possibly 4-6 million acres lost this year due to flooding in the Midwest. This has been enough to force corn, soybean and some meat prices to record prices this month. If prices rise further due to a reduction in yields due to a hot dry spell during pollination, will the government be forced to take action to mitigate the impact on food inflation?

Analysis: We have had some heavy showers this weekend here in parts of Midwest this weekend. I normally would have said some good showers, but anything more then a light shower is not good right now. The estimates of losses in Iowa alone are over $3 billion and possibly 4 million acres. Add the flooding along the Mississippi in Missouri and Illinois and the fields flooded by heavy rains in Wisconsin, Indiana and Kansas, and the total might end up as high as 6 million acres. With the continued showers, it has made it impossible for farmers to return to their fields to finish seeding of the soybean crop or re-seed their flooded fields of corn and soybeans. If you add the possibility (some say probability) of a hot, dry spell this summer during pollination, and the stage is set for another jump in corn and soybean prices. We could see $10 corn and $20 soybeans.

Such a jump in prices would have a major impact on all the major grain nd grain processing companies, including Cargill, ADM, Bunge, Corn Products International and Tate & Lyle. It would also be negative to the major food and meat producers such as Kraft Foods, Conagra, Kelloggs, Smithfield, Unilever, Tyson and Pilgrims Pride. The ethanol companies would be hurt as well unless ethanol prices continue to climb. Only the major fertilizer companies (Mosaic and Potash) and seed companies (Monsanto, DuPont's Pioneer Seed Syngenta, Bayer Life Sciences, and BASF) will do well as demand will increase for next year. It is important to note that 6 million acres is less then the total intended acres for corn and soybeans this year, which means that majority of farmers will could still have a good crop with extraordinary prices.

The NYT article talks about two possibilities the government might consider to reduce a jump in food prices.  The first is to reduce the mandates on ethanol which is set at 9 billion gallons this year. It mentions a new study to released on 6/23 by Keith Collins and reportedly showing that ethanol is responsible for up to half the increase in corn over the past few years. The GMA and beef, poultry and pork organizations are all pushing for a cut in the ethanol mandate, which should be tied to a reduction in subsidies to assure a reduction in corn to ethanol use.

The other proposal mentioned is an opening of some of the land in the Conservation Reserve Program (CRP). With about 34 million acres in this program, this is the only way to bring down corn,  soybean and wheat prices by the end of 2009, except for perfect crop weather for the remainder of 2008 around the world. A large portion of the 34 million acres is not really productive farm land and will remain there no matter what. Subject to how bad the crops end up this year, a release of 10-15 million acres even for one year would be enough to bring prices back down to levels that would be acceptable to everyone and still allow for the ethanol mandate to be in place in 2010. It would also mean a banner year for almost all sectors by the end of 2009, most especially the seed and fertilizer companies around the world!