Released April 18, 2008

COLLEGE STATION, Texas -- Many are quick to blame high-priced corn for escalating food prices, but the primary catalysts are $100-plus crude and higher overall production costs. Put it all together and it’s hurting the Texas agricultural economy, according to a report by the Agricultural and Food Policy Center at Texas A&M University.

Economists with the center, part of Texas AgriLife Research and the Texas AgriLife Extension Service, found the underlying force driving change throughout the agricultural industry is more directly related to high energy and production costs – though corn does play a role in some higher food costs.

“Though crop farmers are receiving historically high prices, it’s negative territory for the Texas livestock industry when you factor in how much is being spent by producers to feed those animals and production costs associated with fuel, fertilizer and other inputs,” said Dr. David Anderson, AgriLife Extension economist in College Station.

Farm acreage is receiving pressure as a result of high-energy costs, Anderson said.

“Corn and other commodity prices would have to increase (to offset rising energy costs),” he said.

Substantial increases in fertilizer prices led to a 3 million-acre reduction in U.S. planted corn acres for the 2006-2007 crop year, according to the report, “The Effects of Ethanol on Texas Food and Feed.”

“Higher production costs will continue to pressure acres as producers are faced with expensive fertilizer and diesel prices to plant crops,” Anderson said. “This research also supports the hypothesis that corn prices have had little to do with rising food costs. Higher corn prices do have a small effect on some food items.”

Important food items such as bread, eggs and milk have high prices that are affected by higher corn prices, but “fundamental supply/demand relationships in the world have had a larger effect,” Anderson said.

Speculative fund activities in the futures markets have led to more money in the markets and more volatility, he said.

“That increase in price volatility has encouraged wider daily price move limits,” he said. “The end result has been the loss of the ability to use futures markets for price risk management due to the inability to finance margin requirements.”

The potential exists for even higher corn prices based on historical changes in overall yields, Anderson said.

“Fewer corn acres planted in 2008 leaves production susceptible to weather risks,” he said. “Small yield reductions will result in even higher prices.”

The livestock industry has borne most of the costs of high corn prices, according to the report. The structure of the industry has made it unable to pass costs on, either up or down the supply chain.

“The livestock industry is in the middle of this transition, and prices don’t yet reflect the impact of higher costs,” Anderson said.

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http://agnews.tamu.edu/showstory.php?id=444

Contacts: Blair Fannin, (979) 845-2259, b-fannin@tamu.edu

Dr. David Anderson, (979) 845-4351, danderson@tamu.edu