Minnesota Farmers Union

(June 12, 2009) - In this series of columns we examine the impact of the rapid run-up and subsequent decline of crop prices on various groups, including crop farmers; livestock, dairy and poultry producers; importing countries; and consumers and whether or not a properly managed grain reserve program could have mitigated the problems faced by each of these groups. In this column we look at the ethanol industry as an important cause and casualty of the price bubble.

To some extent the increased use of corn in the production of ethanol can be attributed to changes in agricultural policy in 1996 and the growing scientific consensus on the role of human activity on global warming. The 1996 Farm Bill effectively eliminated the floor on crop prices and, when the universally anticipated structural increases in corn exports did not materialize, allowed grain prices to fall well below the cost of production.

The explanation for the low prices was "over production" even though the year-ending stock-to-use ratio for the years beginning with 1998 was well below historic levels. With significant fixed costs, crop farmers continued to plant their fields to minimize their losses, hoping that a random crop failure somewhere would lift prices to profitable levels.

(June 5, 2009) - Grain and livestock producers are not the only ones affected by the increase in crop prices that began in September 2006; urban consumers have been affected as well, or at least indices of food price changes would suggest so. Between September 2007 and September 2008-just after crop prices hit their peak-the retail cost of cereals and bakery products for urban consumers increased by 12.3 percent. Between January 2000 and December 2005 the year on year price increase for cereals and bakery products averaged a little over 2 percent.

As prices peaked, some conceptualized the issues as one of food vs. fuel as much of the consumer price increase was attributed to the increased demand for corn as the basic component of ethanol production. The ethanol demand for corn increased by nearly 100 percent between the 2005 and 2007 crop years while corn prices increased by 149 percent. It is easy to understand why ethanol was identified as the underlying culprit of the jump in food prices.

But the increase in food price is much more complex than just an "ethanol did it" story. In fact, not even the corn price increase itself is simply an ethanol-did-it story. Let's first take a brief look at the run up in corn prices before discussing the food price issue.

(May 22, 2009) - For the first time in years, the possibility of establishing reserve stocks has come to the fore - even if it means that the Secretary of Agriculture and a major farm group have come out against them. There was a time when the issue of reserve stocks was so far off the table that opponents did not even bother to denounce them.

The event that brought the issue of reserve stocks to the table was the dramatic price bubble in grain and oil prices that started developing in the last half of 2006. As prices soared, many developing countries saw food riots and a number of countries took actions to protect their food markets by restricting the international trade of some commodities.

In the face of those events, some have been giving reserve stocks a new look as a means of mitigating those problems by having adequate supplies available to meet sudden increases in demand - like ethanol - as well as sudden decreases in production - crop failures in Australia and the Ukraine, as occasionally these two type of events happen at the same time creating a "perfect storm."

Without going into the details of a reserve at this time, we would instead like to look at the issue of reserves from the perspective of various market participants. This week we would like to look at reserves from the perspective of grain farmers.