World energy demand driving grain prices

Farmers in the Southeast will benefit in the short-term from historically high commodity prices, but how long the boom days will last and what is to follow are tough questions that will shape the future of agriculture.

Bill Holbrook, an economist and futurist with ProExporter Network contends the pursuit of energy worldwide is driving the price of U.S. commodities. World, not domestic factors, he says, are driving grain prices, in particular, to artificially high levels.

Worldwide stocks of grains, especially wheat, are at levels not seen in the last 50 years. The lack of supply, coupled with the demand for grain by countries with the financial resources to buy them often puts the U.S. in a negative situation. The low value of the dollar contributes to the problem.

In the Southeast, there is a perpetual shortage of grain, even when stocks are high, because of the tremendous numbers of cattle, hogs and poultry. North Carolina, for example, produces over two million acres of grain crops annually, but is still a grain deficit state.

The fluctuation in grain prices and subsequently their availability for food stocks and livestock feed is directly tied to our use of fossil fuels. “World energy demands are driving agricultural prices up,” according to Holbrook.

“Low food prices historically have been tied to our efficient use of fossil fuel. Cheap energy is gone, and so is cheap food,” Holbrook says.

He explains that oil prices near, or in excess of, $100 a barrel forces consumers to buy energy from any source available. As long as soybeans for biodiesel and corn for ethanol are a part of the energy industry, these prices will remain high as long as transportation and food compete for them, Holbrook stresses.

Unless some foreseen series of events happens, like a worldwide recession, Holbrook says high oil prices and subsequently high energy and food prices are going to stay with us for the foreseeable future.

Corn Prices

The high price of corn, in particular, has put a strain on livestock and dairy production in the Southeast. Though Holbrook contends consumers in the U.S. will pay for high quality meat products, he notes the price will be high as long as corn prices are high. He predicts the average price of corn will level out at about $4.50 per bushel.

Corn acreage increased slightly in the Southeast in 2006, but made a 20 percent to 30 percent increase in 2007. Clearly, corn has been the crop of choice in the region for the past couple of years. In 2008, however, there is no clear-cut choice, because all commodity prices are up.

U.S. corn growers, Holbrook says, will likely plant slightly less than 90 million acres in 2008 — down 4 percent to 5 percent from 2007. Average corn yields, nationwide, are projected at 158 bushels per acre. Record drought in the Southeast last year pushed corn yields to less than a third the national average. “If the Midwest has a drought in 2008 comparable to the drought in the Southeast in 2007, it will be catastrophic because of the low stocks worldwide,” he says.

Ethanol production has spurred the demand for corn, but that market may be in for some hard times, according to Holbrook. The record return on investment that was occuring with ethanol in 2006 is gone. Margins on ethanol have fallen to 20 cents per gallon, nearly a dollar a gallon less than the boom days of 2006.

By the beginning of 2008 distillers dry grain (DDG), a byproduct of ethanol production from corn, dropped to 85 percent of the value of corn. Holbrook says the price of DDG has gone down in recent months and continues to decline. This, he contends, will add to the poor return on investment for ethanol investors.

Holbrook contends by 2009, the U.S. will have the capacity to produce 13.5 billion to 14 billion gallons of ethanol, but he doubts production will actually be near that level.

A recent failure of a large (120 million gallons per year) ethanol plant planned for Sikeston, Mo. is the latest casualty of the ethanol roll back.

Bootheel Agri-Energy planned to build the 120 million gallon per year in Sikeston. David Herbst, chairman of the company, says investors will get their initial quality investment back. Herbst explains only that issues came up between the lender and the contractor that could not be resolved.

Plans for five similar-sized ethanol plants to be built in North Carolina and Virginia were announced by Agri-Ethanol LLC back in 2006. The first of these plants, scheduled to be built in Aurora, N.C., was scheduled to begin operation in the spring of 2008, but no construction is under way and apparently plans for all the ethanol plants has been scrapped.

Soybean Stocks

Growers in the Southeast have a difficult time competing with the Midwest for soybean yields. The average yield nationally for soybeans is 42 bushels per acre, with total U.S. production for 2008 estimated at 2.95 billion bushels. By treating soybeans as a primary crop, choosing high performing varieties and protecting their crop with fungicides, growers in the upper Southeast can come close to yields achieved by growers in the Midwest.

There is concern that U.S. soybean yields are stagnating. In the Southeast however, the trend is toward increasing yields. Planting early-maturing varieties (maturity Groups III and IV) from late March through late April to avoid drought stress that is common in July and August is the major reason for this increasing yield trend.

Research results indicate that yield increases can be as high as 20 bushels per acre from non-irrigated plantings made before mid-April versus later.

Long-time no-till soybean planting, combined with highly effective strobilurin and triazole fungicides to protect beans from buildups in disease organisms in no-till systems, is another reason for increased production in the Southeast.

As of March 2008 soybean stocks worldwide were not at record low levels, but were going down at rates that will put supply at or near record lows over the next year. This downward trend and continued struggles worldwide to increase overall production, led Holbrook and other analysts to predict a longer run for soybean prices than for corn or wheat.

More emphasis has been placed on biodiesel production in foreign countries than in the U.S. Weather-related shortfalls in oil crops around the world have contributed to both the short supply and high price of soybeans. As with corn, the demand for energy is having a direct impact on soybean prices.

Holbrook notes that soybean meal prices continue to move downward, while soybean oil prices are moving upward. This is good evidence that energy demands are once again driving the cost of the commodity.

It is estimated worldwide production of biodiesel will reach a billion gallons in 2009. Soy oil is expected to provide the stock for at least half the total output. Another source is from corn oil, which can be extracted pre- or post-processing for ethanol.

China is likely to play a bigger role in the development of the biodiesel industry than for ethanol. With over 300 million people in the Chinese middle class, the demand for fuel for trucks and automobiles is projected to climb dramatically. This competition for energy with the United States and other developed countries is a primary reason grain-for-fuel prices will remain high.

Biodiesel production in China is expected to increase in coming years. China now consumes twice as much diesel as gasoline. Higher diesel use is a result of the widespread use of trucks, particularly for farms. Mechanized farm equipment has also contributed to increases.


While corn and soybean price increases are partially explained by the demand for this commodity for use in alternative energy production, the dramatic price increases for wheat are more complex.

Historically, wheat prices have traded on the coattails of other grain crops. Energy demands may be indirectly the cause of high wheat prices, but a more direct reason is the worldwide wheat failures, or partial failures; combined with high demand for wheat-containing products and an unstable trading market.

The high price of wheat in particular has drawn the attention of investment bankers and large financial investment portfolio managers. The dumping of millions of dollars by investors into the U.S. wheat market has driven prices to artificial highs.

“It’s simple arithmetic, says North Carolina grain dealer Jim King, “an investor buys $10 million in wheat futures, prices go up 10 percent the next day. He sells the wheat and makes a nice profit for his investors.”

In the meantime, farmers in the Southeast, who scurried to find wheat seed and planted a late crop have two problems. If they haven’t sold their crop, they may not find a buyer — not at current artificially high prices. If they sold for high prices, and their late-planted wheat doesn’t produce the bushels needed to fill the contract, they will be in the position of having to buy artificially high priced wheat.

The 2007-2008 wheat crop is expected to be up in acreage about six percent nationally. In the Southeast that number may be 20 percent to 25 percent. Average yield is forecast at 43 bushels per acre. Unlike corn and soybeans, Southeastern farmers can and do produce yields comparable to the Midwest breadbasket.

More so than any time in recent history, the springtime jury is still out on how many acres of grain crops will be planted in the Southeast in 2008. However, by taking a look at the gas pump, one can probably get a good idea of what prices are going to be.

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