Midwest Floods Ruin Crops

The United States was fortunate to be an observer, not a victim, when natural disasters ravaged global crops in the first part of this year. Spared from the turmoil, U.S. farmers planted near-record crops this spring and expected to enjoy record prices.

Now, however, there is devastation here, too. Weeks of heavy rain in the Midwest have caused rivers to swell and levees to break. Millions of acres of farmland are now underwater, their plantings most likely destroyed. In Iowa, the country's top corn-growing state, more than 1.3 million acres of corn and 2 million acres of soybeans have been flooded; in total, about 16 percent of the state's farmland is submerged. The full extent of the damage is not yet known. In parts of the upper Midwest, where floodwaters are receding, farmers are assessing their losses, but farther south, along the Mississippi River in Missouri, the waters are still cresting. Comparisons to the catastrophic 1993 floods, which cut corn production by nearly 30 percent in the Midwest and caused $15 billion to $20 billion in damage, are already being made.

For the U.S. corn supply--and consumers--there are two immediate concerns: higher prices and shrinking supplies. On Monday, corn prices on the Chicago Board of Trade flirted with $8 a bushel--up nearly 20 percent in the two weeks and more than double the price last year. Typically, high prices encourage farmers to replant lost or damaged crops. But it is now summer, and replanting at this point is a high-stakes game, especially for corn, which has progressively poorer yields when planted after mid-May. The costs of replanting can become prohibitive, as well. "If I have to put fertilizer and herbicide down again, I might be putting another $200 an acre into the ground," says Iowa Farm Bureau Federation Director of Research Dave Miller. "There is a point when the economics say that it's not a risk worth taking." Even if farmers do replant, they will have to wait at least a week for soils to dry out, Miller says, and yields will most likely be 30 to 40 percent below average.

One point seems certain: The United States will produce less corn this year than last year, which will ratchet up competition for what remains. The drop in corn acres, in fact, predates the floods by several months, since many farmers switched from corn to soybeans this year, and a wet spring delayed some plantings. But flooding has greatly accelerated the loss, and it has also rekindled questions about use--should corn be consumed, converted into fuel, fed to animals, exported?--and about how much the corn now being used for ethanol is affecting food prices. In 2007, U.S. farmers harvested about 13 billion bushels of corn. This year, in light of everything that has happened, the most recent estimates put that figure down at about 11 billion. Meanwhile, demand for corn-based fuel is still growing: Corn used for ethanol is expected to jump by about a billion bushels, or 30 percent, this year.

And yet ethanol producers, like farmers, are in trouble. Flooding has knocked at least five ethanol plants temporarily offline--a sizable but fixable problem. Record corn prices are proving more debilitating. According to several new reports, many small and midsize ethanol plants, staggering under corn costs, may have to close or suspend their operations this summer. Profit margins have evaporated; many plants are running deficits. Larger operations are hurting, too: In what seems an ominous sign, VeraSun Energy Co. announced today that it had decided to delay the opening of what was expected to be one of the largest ethanol plants in the country, citing costs.

Meanwhile, the debate over U.S. ethanol policy has intensified. The Environmental Working Group, a prominent critic of corn-based ethanol, issued a report this week in which it warned that the extreme weather problems in the Corn Belt will very likely worsen food inflation this fall. Congress, the report said, has only one recourse: reopen the debate on the ethanol mandate." (The mandate, passed in December, requires that the U.S. produce 15 billion gallons of corn-based ethanol by 2015.) But ethanol proponents say such calls are misguided. "Their case is built upon a faulty premise," says Renewable Fuels Association spokesperson Matt Hartwig. Without ethanol blended into gasoline, Hartwig says, gas today would cost 50 to 60 cents more per gallon, which in turn would raise fuel costs incorporated into the price of food.

Lawmakers are lavishing attention on the food-fuel dilemma, but they, too, are getting and sending conflicting messages. In May, Sen. Kay Bailey Hutchison, a Texas Republican, called for a freeze on ethanol production at its 2008 level. She has been strongly rebuffed by Sen. Chuck Grassley and other Senate defenders of ethanol. The Senate Energy Committee has since held hearings on the matter; one guest, Prof. Joe Outlaw of Texas A&M University, noted that reducing ethanol mandates by one quarter to a half might bring corn prices down 5 to 10 percent. And today, a group of 58 members of the House of Representatives sent a letter to the Environmental Protection Agency, which is reviewing ethanol policy, in which it advocated that the United States "rapidly transition away from biofuels that draw down our food supply."

How will this affect consumers? Since the flood damage has not been fully assessed, it is hard to say, but two main points can be made. First, the price of food in the United States is primarily dependent upon fuel, marketing, and processing costs, not on the daily fluctuations of the commodity markets. Higher corn prices may nudge costs upward, but only so much. Second, some food prices will rise more than others. The cost of an ear of corn, since it is not processed, will jump more than Corn Flakes. Meat prices will also be volatile. Since corn-based feed is so expensive, many livestock farmers are in debt and trying to "liquidate" their stocks. That means that meat prices might drop temporarily and climb in the fall.

By Kent Garber