The Price of Corn: Ups and Downs (Part 2 of a 3 Part Series)

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So now that we know the deal with the futures market, let’s talk about the actual price of corn.  Actually, let me first answer what may be a blaring question: Why corn?  In fact, why talk about any of this at all?

Answer: corn is crazy important.  On the national level, it’s by far the most significant of any crop: subsidized twice as heavily as the next highest and taking up more land than Mississippi and Florida combined.  From a dietary standpoint it bears even more weight: thanks to our monocultured diets, 70% of the organic matter in our bodies can be directly linked to corn.  It’s in our soda, our cereal, and our Slim-Fast.  It’s in the burger, the bun, the cheese, the ketchup, the mayo, and the bacon AND the beer.  It fuels our cars, polishes our floors, sides our houses, and lights our streets.  America doesn’t run on Dunkin.  It runs on corn.  Lots of it.

You may be wondering: why do we pray so dutifully to “the golden chaff”?  Welcome to the history of corn subsidies…

Subsidies Over the Ears

Quick recap: back in the ‘30s, during the Depression and the Dust Bowl, farmers found themselves in a serious problem.  As they planted more and more crops just to squeak out a profit, they actually made less and less money.  Farmers were creating way too much supply, and the plummeting value was forming a vicious cycle.   It got so bad that by 1933, FDR had to pay them to not farm.  At the time, the decision to subsidize farmers was a short-term, last-resort measure to prevent a national catastrophe.  Little did FDR know subsidies would come to define US agriculture.

In 1933, subsidies were just picking up steam.

Fast-forward to 1973.  You’re Richard Nixon and you need to deal with the exact opposite problem: food prices are ballooning, now almost double what they were just 3 years ago.  How do you get commodities back down?  Actually, the same way as before: more subsidies… pay attention, this part’s important…

Back in the Dustbowl days, crop prices went down because farmers were producing more than could be bought.  When they were enabled (through subsidies) to produce less, prices went back up.  It’s this seesaw of supply and demand that keeps the market in equilibrium – thanks to the threat of price drops, there’s always an incentive to keep production in check.  This all changed with the Agriculture and Consumer Protection Act of 1973, which introduced deficiency payments to the American farmer.

Here’s where things start to get crazy.  Basically, with the 1973 Farm Bill, the government set guaranteed target prices for specific commodities.  For instance, corn’s target price was $1.10 per bushel.  This meant that no matter what – no matter how much corn farmers planted, even if it was WAY more than the market could bear – the government would see to it that they got $1.10 for every bushel they sold.  Think about it – if the supply-demand seesaw no longer applied, what incentive was there to limit production?  If they would never be penalized for planting too much, wouldn’t it be in the farmer’s best interest to max out every acre he owned?

It was, and that’s exactly what farmers did.  All of them.  The resulting boom in production didn’t just return food costs to pre-balloon levels, it cut those levels in half.  In some lights, it was a win-win-win: food manufacturers were buying materials at all time low prices, farmers were selling a ton of crops for more than they were worth, and with the dirt-cheap surplus, the US became a competitive powerhouse in the international commodity market.  Nixon did good… right?

Well, certainly not if you care about health, or culture, or quality of life, the developing world, the environment, or any softee stuff like that.  Because by making a handful of commodities – wheat, meat, and corn – super cheap, what Nixon basically did was change the American diet (the global diet, really) to that same handful of ingredients.  The American farm belt was running on jet fuel, and if you weren’t – whether you farmed rice in India or lettuce in New York – you couldn’t keep up.

The Modern Rollercoaster

Though deficiency payments didn’t stand the test of time, their legacy did.  Beginning in 1996, the government no longer paid the difference between actual and target prices, as was the case with deficiency payments.  Instead, fixed payments, proportionate to the size of the farm, were determined on an annual basis.  This program (known as “flexible contract payments”) is more or less the same today.  To calculate a farmer’s payment, all you’ve got to do is multiply his payment acreage (83% of the total land devoted to the commodity crop) by the payment yield (how much of that crop he can plant per acre, annually) by the going commodity rate.  Let’s say a farmer has 400 acres devoted to corn and can produce 150 bushels per acre a year.  With the 2008 rate for corn at 28 cents per bushel, that farmer would receive about $14,000 in government subsidies.

What’s significant about this is that, though they were still enjoying government aid, farmers now needed to pay closer attention to the fluctuation of the futures market.  If the price of corn went down, they’d make less money – simple as that.  From last post, we know that the futures market can be a wild ride… a look at just this last month shows that roller coaster in action…

…and here we go!  Leading into this planting season, the price of corn is climbing fast.  First, ramped up government ethanol programs increases demand… and up goes the price.   Next, the forecast of a super soggy planting season means a decrease in supply, projecting futures even higher.  By the time a bushel of corn hits an all time high of about 8 bucks, farmers are geared up to plant as much of the stuff as the could.

The plight of the farmer.

But wait!  You know that rain that was supposed to destroy a bunch of crops?  Yeah, it never comes.  So now all that extra corn farmers planted ended up surviving, contributing to the 2nd largest corn crop since WWII!  Never mind about that decrease in supply, now prices are falling thanks to an oversaturation of the market!  Oh, and BTW, for the first time in years, Russia is exporting wheat again.  That means it’s getting cheaper, which sucks demand away from our corn.  Within three weeks, the price has fallen over 20% to $6.29.

Hold on though!  You know that rain that never came?  Well now it’s causing a really bad drought in the south.  Did we say oversaturation before?  Guess we’re back to not having enough to go around.  So now – just yesterday – the price has jumped back up a dollar in just 2 weeks!

Ugh, this is exhausting to write about.  Could you imagine the stress of actually living it?  Of depending on this rollercoaster for your livelihood?

In the NY Times’ coverage of the Southern drought – which made front-page headlines this Tuesday – it closed with the opinion of a professor in the field: “The biggest losers are the consumers”.  I’ll save that topic of consumer pricing for next time.  But whatever plight consumers face, it’s hard to imagine that these farmers – especially the ones battling a drought comparable to the Dust Bowl – have it much easier.


One comment on “The Price of Corn: Ups and Downs (Part 2 of a 3 Part Series)

  1. DM says:

    Interesting thoughts…

    The price of corn is up to 654 cents per bushel now

    corn price

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