Prescription for $8 corn
With prices for grains soaring, food inflation on the rise, and the animal agriculture industry and consumers around the world face red ink or hunger, what comes next?
Opinions abound about ethanol-from-corn, and so do prescriptions for what comes next. Corn farmers must feel like the well-fed skunk at the community picnic, with prices for their grains soaring, though food inflation is on the rise, and the animal agriculture industry and consumers around the world face red ink or hunger. But corn farmers point a finger of blame at price inflation in oil and other commodities, and rising consumer demand in places like China and India, and they are partly right. After all, they are just helping the USA along the path to cleaner, more affordable energy. But are they? In other quarters, the view is starkly different.
Environmentalists, for example, who not long ago applauded ethanol subsidies and mandates, now judge ethanol-from-corn in light of new studies that show its production a net user of energy and its production and use more polluting to the environment than originally thought.
Economists and consumers, meantime, call for a rethinking of the ethanol subsidies and mandates on economic grounds. While the price of food in the USA increased by an average of only 2.5 percent between 2001 and 2006, the U.S. Department of Agriculture predicts overall food prices could increase between 4 percent and 5 percent in 2008. And consultant Jim Hertel, of Willard Bishop, thinks that food inflation in the USA could rise to between 7 percent and 10 percent.
Overseas the problem in many countries is dire. In the last year, food riots occurred in virtually every continent, and panic buying has occurred over rumors of imminent price increases. Meanwhile the International Monetary Fund warns of increasing political and economic uncertainty and even the threat of war as populations find themselves unable to afford food.
Even Venezuela's leftist president Hugo Chavez has weighed in, calling the current food crisis "the biggest demonstration of the historic failure of the capitalist model" never mind the fact that his own country continues to import most of the food it consumes, despite a nationwide agrarian reform initiative he launched more than six years ago. There's irony, too, in the fact that the U.S. ethanol-from-corn mandates result from the U.S. Congress' abandonment of free-market principles in favor of government tinkering.
So, don't blame free enterprise it is central planning at work here. And don't blame the corn farmers for the food crisis. They're just doing their job growing corn and giving thanks for the high prices they are receiving for their crops. No, the blame rests with our elected representatives for legislating the mandates and the President for signing them into law. Assessing blame, however, is easy. What is the prescription for the companies that feed the grain to animals to produce meat for consumers in the USA and around the world and for those who are cutting back or going without food?
Consumers appear to be at the mercy of worldwide economic forces and policymakers in Washington and other world capitals. But from Pilgrim's Pride Chief Executive Clint Rivers, here's straight talk for the U.S. broiler industry: "I think today the industry is thinking in terms of placing [broilers] for $6 corn when I think we should realize the potential for $8 corn is certainly there and I think we should be in a position to deal with that." Rivers said this at the BMO Capital Markets agriculture and protein conference in New York City.
With corn hitting a record $6 per bushel this year, Pilgrim's Pride recently announced it is cutting production by 5 percent. Rivers said he would like to see a 3 percent to 4 percent reduction in U.S. chicken production. The industry recently cut egg sets by 2 percent to 3 percent. While not to the level that Rivers would like to see, this may be enough to restore profitability if corn prices don't escalate further. Production restraint, however, needs to continue into the winter months. Meantime, in order to more quickly pass on higher costs to consumers, Pilgrim's has shortened the duration of fixed-price contracts with grocery stores, restaurants and other customers to as little as 90 days from a year.