As corn prices continue to rise, what impact are ethanol subsidies having on the corn industry? During today's OnPoint, Rick Tolman, CEO of the National Corn Growers Association, explains how ethanol production is affecting the price of corn. He also discusses how the Department of Agriculture's projected record corn crop for 2011 will affect prices and stability in the market.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Rick Tolman, CEO of the National Corn Growers Association. Rick, thanks for coming back on the show.
Rick Tolman: My pleasure, glad to be with you.
Monica Trauzzi: Rick, the price of corn has been steadily going up over the past few years. What's the cause and should the industry continue to receive assistance from the government when the price is so high?
Rick Tolman: The price has gone up. It has gone up and down. One of the things we forget is a year ago the price of corn was three dollars a bushel. Right now it's around seven and it goes up in response to market forces. The ethanol piece that a lot of people focus on has been a pretty steady demand, but what's driven up corn prices this year is the shortage of wheat internationally, in the Ukraine and Russia and elsewhere. So there's kind of market forces and speculation that have driven it up and down. We have a short crop this year, if we have a good one. Or last year we had -- it will go back down again. It's really a volatile market-based situation.
Monica Trauzzi: And I think the big question is what impact is corn ethanol production then having on prices?
Rick Tolman: Corn ethanol or ethanol certainly does have an impact on prices. There was an interesting study that Iowa State came out with two weeks ago that measured the ethanol market piece and the ethanol subsidy or tax credit piece, as well as market forces. In a normal supply situation, the ethanol piece has steady impact on prices. In a short supply situation, like we had in 2007 and we had this year, by far it's the market forces that drive the price up and ethanol really has very little impact on the price.
Monica Trauzzi: Have farmers moved away from growing corn and towards other things like cotton and does that help explain a bit of the price fluctuation?
Rick Tolman: No, actually just the opposite. Corn has a tremendous productivity. Our yield has been increasing at an increasing rate over the last few years and we've actually seen cotton acres and wheat acres decline in response. We have more corn acres than any of the other crops and, in fact, this year we should have a fairly significant increase in corn acres because of this price response. So it's not so much that, it's the growing demand, as well as these market forces.
Monica Trauzzi: So USDA has projected a record crop for 2011. Should prices go down then as a result?
Rick Tolman: Absolutely.
Monica Trauzzi: If supply is more abundant?
Rick Tolman: Yeah, just like I said, a year ago price was half what it is now. In June of last year the prices started climbing because Ukraine announced a ban on wheat exports. These wheat, corn, soybeans are all somewhat connected in world supplies. The difference between having too much and too little is very narrow. We had a 5 percent reduction in our trend line yield last year because of weather and that was enough to shorten our crop. This year, if we have a 5 percent increase we'll have a 2 billion bushel carryover which would significantly decrease prices. So it's an interesting dynamic.
Monica Trauzzi: Why do you think the corn industry has come under such fire in recent years?
Rick Tolman: I think for a couple of reasons. One is it's been very successful in creating new markets. We have a lot of productivity and so we've looked outside our normal markets. Normally the majority of corn goes for livestock feed, for export, and for human consumption and those three markets have been fairly flat. We've had this productivity, so we've moved into biofuels to soak up the extra productivity. You get into biofuels, you're dealing with the oil industry who's very powerful, very strong politically, a lot of money and the ethanol industry has taken away 10 percent of their market and they're not willing to let much more that go easily. And I think that's what's driven this.
Monica Trauzzi: As the debate over subsidies continues there are many questions about whether the corn ethanol industry should continue to receive subsidies. Is corn ethanol on the way out? I mean there's a lot of talk in Washington about it being a short term solution.
Rick Tolman: I think that's a little -- it is the beginning of the wave and I wouldn't say it's on its way out. Let me answer the subsidy question, or actually for corn ethanol it's a tax credit and it's semantics, but, you know, we've already said, the industry has said we don't want to be subsidized. We want to have market access and we have agreed to reform the VTEC, which is the tax credit. Last year we asked for a one-year extension so we could have time to reform it. We have a proposal in place to completely reform it and we've offered that, the oil industry has not. They're fighting changes in their subsidies. But really what we want is market access. We want consumers like you to be able to say I want gas or I want ethanol or I want a blend and we have to work through the oil industry now to get to the retail consumer and that's what the tax credit is and it was an incentive for wholesalers to blend ethanol. We don't need to be subsidized. We can compete at $90 a barrel oil without any subsidy, but we need market access.
Monica Trauzzi: So the industry would do just fine without that subsidy?
Rick Tolman: Absolutely. They need a safety net, but they need market access is what they need to be able to get to consumers.
Monica Trauzzi: OK, we'll end it right there. Thanks for coming on the show, nice to see you.
Rick Tolman: All right, thank you very much.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
[End of Audio]