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Corn is an essential crop in the United States.  Corn production accounts for more than ninety percent of the total production of feed grains.  There are about eighty million acres of land that are used to plant corn. The United States is a main component in the world corn trade market.  Corn has a variety of uses, such as energy and food products.  Corn is found in a variety of food products, like starches and beverages. With the expansion of ethanol production in the United States, there have been a various effects on the corn market.

Since the rise in oil prices, the United States has been using alternative fuels.  The major alternative fuel that is made from corn is ethanol.  Ethanol is an alcohol-based fuel made by fermenting and distilling crops that have been broken down into simple sugars.  In the United States, ethanol is generally made from starch crops such as corn or sorghum.  In 2006, U.S. ethanol production shot up to almost five billion gallons. 

Many farmers are deciding to grow corn to be used for ethanol and not grow it to be used in for feed grain.   Because of the ethanol expansion, there have been changes in the United States agricultural sector.  There have been various effects on the field crops sector.  Such as domestic demand, exports, prices and allocation of acreage among other crops.

Farmers are changing their cropping choices.  Federal tax laws provide incentives for biofuels, which makes ethanol more economical to produce.  Ethanol has a small effect on the gasoline market but it has a dramatic effect on the corn market.  Ethanol demand is very inelastic, which means it is unresponsive to price changes.  The corn market is more vulnerable to price changes.  As the ethanol industry absorbs more shares of the corn crop, higher prices will affect domestic use and exports.  Thus providing more intense demand competition between domestic industries and foreign buyers of feed grain.

Higher prices affect the role of corn as animal feed.  Livestock is the largest use of United States corn, but according to USDA 2007, corn for animal feed is expected to decline to forty to fifty percent of total used over the next ten years.  Stronger ethanol demand will result in lower carryover stocks of corn.

Other crops are being affected but the expansion of the ethanol industry.  Soybeans complete most directly with corn and on the largest amount of land.  Since more farmers are producing corn in the use for ethanol, soybean production will decrease because more land would be used for planting corn.  A reduction of soybean production would mean a higher price for soybeans, which would bring a reduction in exports and lower levels of carryover stocks and higher prices for soybean meal and oil.  Also cotton production is expected to decrease within the next couple years. 

In response to the increase of corn prices, meat production in the livestock sector is projected to decline but should be offset by the availably of distillers’ grains as a substitute for feed.  But the variably of nutritional value will cause some adjustments in the distiller grains production.  Food products such as red meats and poultry are forecasted to exceed the general inflation rate in the next couple years.

Higher corn prices will also affect the consumer.  Retail food prices have been quite stable for the last twenty years but with the increase of ethanol production, there has been an increase in food prices.  Retail prices are affected both by consumer demand and the interaction between food manufacturers and distributors.  Changes in farm prices for eggs, fresh fruit and vegetables show a more violate prices than less processed foods.  Food producers may adjust tot eh changing market conditions by adopting more efficient production methods and improve technology to counter higher costs.  This will help stabilize the increasing cost of corn.

Although there are some negative effects on the corn market, the overall ethanol production will boost net farm income.  Higher prices of corn will also mean smaller government payments under current farm commodity programs.   Government payments, which accounted for about seven percent of gross cash income in 2005, expected to account for less than four percent in the next decade.  Although the ethanol expansion will bring higher incomes to farmers and reduce government payments, it will also mean higher food prices for consumers. 

About the Author:

Student at West Chester University.

Article Source: ArticlesBase.com - The Expansion of the Ethanol Industry, and Its Affects on the Corn Market