Published on November 11th, 2008 | by Nick Chambers
With New Ethanol Price Volatility, Farmers are at a Loss
When the only factor that determined if farms lived or died was the price of food, farm income was rather boringly steady. Now that biofuels have given agriculture a value greater than staple food crops, farmers have seen some huge rewards. But with those rewards have come greatly increased risks — risks that farmers are finding out the hard way right now.
According to the University of Illinois at Urbana-Champaign, the ethanol boom helped drive two years of record profits for farmers, but in these last two years, grain farmers have become increasingly disengaged from the stable food markets of the past, and placed their bets on the biofuel market.
“We’re just experiencing the full brunt of this new source of volatility,” said Scott Irwin, a professor of agricultural and consumer economics. “When food prices were the main trigger, recessionary impacts were much less direct and much more gradual. Now, there’s this new connection through energy costs that immediately gets translated to agriculture.”
Last summer, corn prices were at $8 a bushel on the futures markets due to rising gas prices. But as demand for fuel has fallen with a weakening economy, speculators have pulled out of the commodities markets and corn prices have plumetted. Currently corn prices are at $4 a bushel, half the value of their summer high. Irwin predicts corn prices will stay that low until “the economy rebounds from a recession that could be the nation’s deepest since World War II.”
Even so, at $4 a bushel that’s nearly 50% higher than it was from 1973 to 2006 when the average price was $2.42 a bushel.
I guess the conclusion to be drawn from this is that, even if the biofuels market has drastically increased the volatility of farm income, the prices farmers are seeing today, even at their lowest, are much higher than they have been at any point in modern history — due mostly biofuels.