Talking with Terry Francl, American Farm Bureau

The price of a bushel of corn and its effect on the price of just about everything else has created more nonsense on both sides of the argument than anything since Walt Disney was a pup. Is it a food vs. fuel proposition? Does converting corn to ethanol so we can feed the gas tanks of America steal food from starving Africans? Maybe shipping cheap corn to Chad actually prevents that nation from developing an Ag base that can grow its own food.

Are we artificially inflating the rush to our environmental doom by funding ethanol production with U.S. tax dollars? Or maybe it’s a sensible way for our government to protect the U.S. economy from the political uncertainties of the world’s oil supply.

There is well-known saying popularized in the U.S. by Mark Twain: “There are three kinds of lies: lies, damned lies, and statistics.” The semi-ironic statement refers to the persuasive power of numbers, and describes how accurate statistics can be used to bolster inaccurate arguments.

So we get incredibly silly photo ops like the Iowa Renewable Fuels Association’s movie time popcorn extravaganza. Forbes magazine quoted Executive director Monte Shaw - "We're here today to pop the popcorn propaganda bubble.”

Standing in front of 11 large plastic bags containing 38.5 pounds of popcorn, Shaw claimed a person could buy that amount directly from a farmer for $5. He pointed to a bag of movie theater popcorn on a nearby table and said it costs the consumer just as much, if not more and said the farmer received just a few pennies for the corn that filled those 11 bags.

The inference, of course, was theater operators were unconscionably ripping off their patrons and just using the doubling price of corn as a flimsy excuse.

Monte, you’re absolutely right about the price of corn being just a small part of the rising costs of food but your argument falls a rung or two below the top of the ladder.

Let’s take your point another step. Recently, a barrel of oil was selling for $72. The American Association of Petroleum Geologists tells me a barrel of oil equals 42 U.S. gallons of oil.

For reasons too strange and complicated to get into, they say, a 42-gallon barrel of oil can yield slightly more than 44 gallons of product. So why can’t I fill up my Chevy Blazer at my local Exxon dealer for $1.64 a gallon?

Are the folks running big oil taking a page from the local movie arcade and trying to rip me off? OK, poor analogy. But you get the basic idea. There’s more t o rising food prices than a bigger price tag for high fructose corn syrup.

To get some real answers, I’ve talked with USDA Secretary Mike Johanns, Bob Dinneen, president of the Renewable Fuels Association and Rick Tolman, CEO of the National Corn Growers Association. Not that any of them are less than honorable men, but one is a politician and two are hired guns for special interests.

I did manage to get interesting responses from each of them, though. Click on their names to go back into CattleNetwork’s archives and read their comments.

To try to get to the bottom of this I spent an interesting five minutes with Terry Francl, Senior Economist with the American Farm Bureau Federation. I know what you’re thinking, too. “An economist? Are you really trying to confuse us?” Or maybe you’re reminded of this old joke about economists and farm animals:

A man walking along a road in the countryside comes across a shepherd and a huge flock of sheep. He tells the shepherd, "I will bet you $100 against one of your sheep that I can tell you the exact number in this flock."

The shepherd thinks it over; it's a big flock so he takes the bet.

"973," says the man.

The shepherd is astonished, because that is exactly right. Says "OK, I'm a man of my word, take an animal." The man picks one up and begins to walk away.

"Wait," cries the shepherd, "Let me have a chance to get even. Double or nothing that I can guess your exact occupation."

The man says sure.

"You are an economist for a government think tank," says the shepherd.

"Amazing!" responds the man, "You are exactly right! But tell me, how did you deduce that?"

"Well," says the shepherd, "put down my dog and I will tell you."

Francl fortunately knows the difference between a merino and a mutt. It’s part of his job. He also knows about the intricate financial movements behind the rising price of a bushel of corn and its real world effect on that over-priced Jack and Coke you had last night. Here’s what he has to say. Just remember, he’s an economist so five minutes can quickly become ten…more or less.

Q. Let's look at how the price of corn affects food and feed. Food, first. Corn - from the standard #10 can on the grocer's shelf to the byproducts used in thousands of prepared foods, snacks and beverages - is probably one of the most widely used agricultural products in North America. Earlier this year, Rick Tolman, CEO of the National Corn Growers Association, told me “The farm level price of corn has very little impact on food prices. There has been virtually no correlation between price changes in corn and changes in the price of food at the retail level. The current value of corn in a $2.79 box of corn flakes is less than 7 cents. The cost of packaging, marketing, wages, energy, etc. have a much bigger impact on the price of food than do changes in the price of corn.”

It's a statement you basically agreed with when you said “Ethanol is getting a bad rap, because people aren’t looking at all the other factors that are involved in food prices.” Break it down for me: What effect does doubling the price of corn have on foods and what are some of the other factors and their effects?

A. The basic assumption that a change in the price of an ingredient will immediately affect the price of a processed product is not one that is born out in either economic theory or in the real world. There are two separate demand curves, one for the ingredient and one for the final or processed product. Just because the ingredient supply/demand conditions change does not mean the supply/demand conditions for the process product have changed and vice versa. Let’s take a look at some real world examples.

Corn prices have changed dramatically the past year so compare that level of change to some of the product prices that are in the next stage of processing. The following are average monthly year-to-year price changes, June 2006 to June 2007:

Corn, Central Illinois..........71.2%
Corn meal, NY............................25.4%
Corn starch, Midwest.....................23.6%
Regular corn syrup, MW...................20.6%
HFCS, MW.................................22.2%
Sugar-dextrose, MW.......................16.3%
CPI for non-alcoholic beverages...........4.4%

In the above example all prices have changed in the same direction, but in different proportions. The ingredient prices have increased at a rate that is from about a fourth to a third of the rate of corn, while the actual price of non-alcoholic beverages is only one-sixteenth the rate. It is estimated that there is approximately 1 cent worth of corn in a can of soda made from HFCS.

Another reality is that farmers only get a small percentage of the consumer food dollar, on average about 19% according to the latest available data. For corn flakes cereal it is estimated to be 4% and for corn syrup 3%. Beef averages close to 50%.

Obviously corn comes through the food chain in the form of many different products. About half of all the corn utilized in the United States goes through the animal and poultry sector. Any impacts from this sector are lagged and diluted. The lag comes from the fact that as feed prices rise producers first cut back feeding rates, thereby reducing the size or weight of the animal or bird being marketed.

If producer’s margins are squeezed long enough, they will eventually reduce the number of animals and birds being fed. This results in less meat and higher prices. That process may take as little as a few months for broilers to several years for beef cattle. Rarely, if ever, are all of the higher feed costs passed on to the consumer. The meat producers end up absorbing some proportion of the increased costs, thus reducing their profits, as do the processors.

So let’s look at some specifics. The weekly egg set for broilers has been running around 2% above a year ago, not a sign that a lot of money is being lost. Also, barrow/gilt and steer/heifer dressed weights are running even with 2006, indicating folks are not short feeding either species. High corn prices are discouraging placing lighter-weight feeder cattle and calves. This should, in turn, have increased 800 pound steer prices at the expense of 500 pound calves. That has not happened, due to the overall tight cattle supply situation. For pork, if they are losing money, why are they increasing the size of the breeding heard?

Looking at the issue in a broader context, we did an analysis of the impact of ethanol and higher corn prices on food prices and expenditures in conjunction with the Food and Agricultural Policy Research Institute (FAPRI). This macro economic analysis suggests there will be little change in consumer food prices in 2007. By 2008, there will be about a 0.2% rise in the consumer price index for food. By 2009, the food CPI rises 0.5% higher than would have been the case without the increased ethanol production. The food CPI goes up by an extra 0.7% over the next three years.

I should note that food accounts for approximately 14% or one-seventh of the total CPI weighting. If food prices were to rise 0.7%, it would result in a 0.1% increase in the total CPI, not exactly an explosion in the inflation rate.

Consumer expenditures for food are estimated to be $2,421 per person this year. Again, it will be 2008 before consumers pay another $1 per year more than would have been the case without the increased ethanol production. The amount increases to $6 per year more in 2009 and then to $11 more the following two years. It tops out at $14 in 2012.

Total consumer expenditures for food are estimated to be $725 billion this year and $745 billion in 2007. By 2008 another $2 billion is added to food expenditure and some $3 to $4 billion per year in subsequent years. However, if this is measured against the expected saving in farm program payment, $8-10 billion per year according to the most recent CBO baseline estimates, consumers who are also taxpayers are certainly net winners.

Q. Corn makes up a much larger percentage of animal feed, particularly cattle, hogs and poultry. Richard Lobb of the National Chicken Council said “We were paying $2.40 a bushel a year ago and now it's $3.80. That's a big blow to our companies.”

As a result, the price consumers pay for boneless, skinless chicken breasts has risen from $3.01 a pound in June 2006 to $3.61 a pound the week ending June 7, according to the U.S. Department of Agriculture's weekly report on chicken prices. Lobb attributes that 20% increase almost exclusively to the price of corn.

People in the cattle and pork industries are making similar claims. Can you talk about the more direct costs faced by your friends in animal agriculture and how they might be able to manage those increases?

A. Again, I would emphasize that there is little, if any, relationship between the price of corn and price of cattle or poultry in the sense that corn is a causal factor. If that were true hog and turkey prices would be up too, but their respective prices are either unchanged or down slightly from a year ago. There are specific supply/demand conditions that affect each respective commodity.

Take the example of milk where farm prices have nearly doubled in the past year, a fact that is widely reported in the media. However, what is seldom mentioned is that farm milk prices declined 15% in 2006, prompting dairy farmers to halt any expansion plans. Then in 2007, not only did domestic demand stay strong, but the international demand for several processed milk products has exploded, as have milk prices. Although some try to attribute the higher milk prices to higher corn prices, one has absolutely nothing to do with the other.

As to how producers in the meat sector can manage the increase in feed costs, there are a couple of actions they might consider pursuing. First, develop an aggressive market risk program for procuring future feed needs in a cost effective manner. We are coming up on harvest time lows so now is the time to start locking in prices. The battle for acres between our four major commodities—corn, cotton, soybeans and wheat—is going to be more intense in 2008 and probably 2009. So don’t procrastinate, develop a plan and implement it now.

Second, look at the possibility of utilizing alternative ingredients in your feed ration. The most common example is DDGs, but there are many other possibilities. For example, I talked to a dairy farmer in the western U.S. that was incorporating potato byproducts in his ration to replace corn. There may be some unusual, some might say unorthodox, feed alternatives out there waiting to be discovered.

Q. Farmers have responded to the rise in the price of corn by substantially increasing acreage and the U.S. industry is reporting levels not seen since pre-WWII. Let's assume decent weather and a good harvest this year. Could you forecast the size of that harvest and what it might do to the price of corn next year?

A. At this juncture I believe the USDA numbers, as reflected in the July WASDE report, are a good base to go from. The USDA will issue an update WASDE in less than two weeks with the first field sample estimate of this year’s corn yield. At this point I would expect that yield number to be within 1-2 bushels per acre of their July estimate. Even once the August yield numbers are known that number can change over the next couple of months as a result of weather.

Finally, I would like to emphasize that we are in a world wide tight supply/demand condition for all of our major commodities.

Q. The production of ethanol is heavily subsidized by the government, a program that some say is artificially boosting the price of corn. In an editorial published in the Billings (MT), Gazette, E.C. Pasour, a fellow economist and professor emeritus in the Department of Agricultural and Resource Economics at North Carolina State University, said this: “When all is said and done, the ethanol program is just another form of political pork that benefits the few at the expense of the many.”

Are the subsidies justified and is Pasour correct in his judgment?

A. At this juncture, the country, via their Congressional representatives, has sent a strong message that the United States needs to develop alternative energy sources via a renewable fuels program. It is not a question of if, but of how. The more productive discussion should be on the “how” and the implications for the various sectors involved, as has been covered above.

Q. Possibly ending the food vs. fuel debate, the June Producer Price Index showed food prices fell 0.8%, dropping for the second month in a row and the biggest drop since May 2006. The PPI report also showed producer prices for energy fell 1.1%, after a 4.1% surge in May. Gasoline prices sank 3.9%, in the biggest one month drop since a 13% fall in January.

One or two months don't make a trend and there are certainly more factors involved in those numbers than the price of corn but let's stay within the framework of your ethanol argument quoted in my first question. What are the most important short term factors involved in the June numbers and are they the same factors that will affect the long term prices of food and fuel?

The numbers often vary considerably month-to-month in both the PPI and CPI. The CPI is probably more relevant to consumers. Please reference the attached article “Fuel versus Food: Is It Reality or Rhetoric?”

Click here to view…


Q. Looking at the food vs. fuel argument with a worldwide perspective, Josette Sheridan of the World Food Programme said in an interview with the Financial Times that “A surge in the production of biofuels derived from corn, wheat and soybeans is helping to push up food prices so sharply that the World Food Programme, the United Nation’s agency in charge of fighting famine, is finding it difficult to feed as many hungry people as it has in the past.”

She expanded on her statement by noting that food commodity prices are surging because of a number of factors including rising demand from China and bad weather, but the potential consequences of the rising demand for biofuels has caught the attention of those in the business of feeding the world.

WFP is charged with trying to feed the world's poorest populations, but pain at that level has a way of moving up the economic ladder. Should the fears she's expressed cause concern within the agricultural community?

A. The specter of the world’s poor not having enough food is often raised in the context of various political debates. The use of renewable fuels as an energy source is no more or less important than the multitude of variables that affect the supply and demand for food and the ultimate price. The reality is that few people are unable to access food due to either the lack of supply and/or price. It usually has more to do with the political and/or economic system that affects the production and distribution of food within a country or region of the world. Where true emergencies exist, say a weather induced famine, the United States and other countries of the world typically provide food and various other forms of food aide.

While I have written several articles in which I argue that higher corn prices have had little, if any, impact of food costs to date, I readily acknowledge that higher prices have had an impact on those purchasing grain and protein for feed. There is no question that the margins associated with feeding operations have been cut significantly, to the point of causing losses in many situations. It is indeed a difficult and challenging time and I have a great deal empathy for those facing this situation. However, this is not the first time this has happened.

Shortly after I started my career as an agricultural economist in the early seventies, then President Nixon opened the U.S. market for grains to the Russians and the Chinese. Corn prices, which had been trading in the range of $1.00 to $1.50 for about two decades, jumped markedly higher and have traded in the range of $2.00 to $3.50 about 95% of the time since then. My price reference is the average annual corn price received by farmers. What happened is that there was a one-time permanent demand shift. The prices of other crop commodities that compete for land also adjusted upward as did land prices and nearly all other inputs associated with crop production. This, coupled with the application of price controls, resulted in some huge losses for cattle feeders and caused many painful adjustments in the industry.

With the advent of the increased use of ethanol we are in the process of making another one-time permanent adjustment in the demand for corn. The new range will probably be at least 50 cents, maybe $1 higher. (There are other issues at work here, such as the declining value of the U.S, dollar, but that is another separate topic.) People, not just in the United States, but throughout the world, are demanding that we increase the supply of renewable energy. As I have previously indicated, it is not a question of if, but of how we are going to do this.

At this point in time, ethanol from corn appears to be the lowest cost solution to this shift in national/international energy policy. Stated a little differently, corn ethanol requires the least incentives or subsidies, at least in the United States. Research to produce cellulosic derived ethanol is being strongly encouraged with many government dollars, but even Agriculture Secretary Johanns acknowledged last week that it would likely be at least five years before cellulosic ethanol would be technically and commercially viable. My own view is that it will most likely take 8-10 years and even then will require government incentives at least equal to, if not greater, than those currently used to encourage the production of corn based ethanol.

My final point is this: Do not believe that the increase in corn and other crop prices is a temporary situation that will be resolved by next year’s crop or the one after that. It is a permanent part of the landscape and everyone must adjust accordingly. Corn prices will continue to be affected by supply and demand conditions, but are unlikely to return to the previous range in the foreseeable future, if ever.