Food versus fuel versus the environment:
Creating a win-win solution through yield
Carl Zulauf, Economics Professor, Ohio State University
The increasing use of farm products to produce fuel combined with the increasing demand for food from rapidly growing less developed countries, especially in Asia, has outstripped the historic increase in the supply of farm products, resulting in higher prices.
Higher prices will bring adjustments. Likely primary adjustments are:
1. less livestock production
2. returning to production removed for environmental reasons by government programs
3. a biofuel market limited in size to legislative mandates tied to clean air
Each adjustment contains negative trade-offs, including reduced availability of food (a problem especially for the poor), less U.S.-produced livestock, a loss of environmental benefits from land retirement programs (notably, the 36.7 million acres in the Conservation Reserve Program [CRP]) and a lost opportunity to develop a second demand source for farm products to reduce the long-term problem of surplus farm production.
A fourth adjustment also exists: increase yields. Figure 1 underscores the historical importance of this option. The figure presents three ratios:
1. yield of corn for a year relative to the yield of corn in 1926
2. acres of corn harvested in a year relative to the acres of corn harvested in 1926
3. the price of corn relative to the index price of fuel for the United States with the ratio indexed to 100 for 1926
The base year is 1926 because it is the first year the fuel price index is available. The data comes from the U.S. Departments of Agriculture and Commerce.
In 2005, the yield of corn was 575 percent of the yield of corn in 1926, acres harvested of corn was 90 percent of the acres harvested in 1926 and the price ratio of corn-to-fuel was 18 percent of the ratio in 1926. When viewed together, these trends suggest the large increase in corn yield not only helped reduce the acres needed to produce corn but also reduced them relative to price, thus increasing the economic competitiveness of nonfood uses of corn.
Implication
The only option this author can think of that can increase access to food by the poor, allow for a viable U.S. livestock industry, create an economically viable market for industrial uses of farm products and increase environmental services from farming is to enhance the rate of increase in the yields of crops. While private biotechnology companies will be key contributors to this effort, increased public funds are needed to train scientists and to research and develop cutting-edge techniques that are too risky of an investment for private firms.
This option does have negative consequences, notably the impact on the environment of high-yield production and in particular the use of nitrogen associated with high yields. Thus, the development of yield-increasing technology should also strive to minimize environmental impacts of ever-increasing yields.
To create a win-win scenario for the general public, farmers and the environment, increased public funding should be allocated for research to enhance yields while minimizing environmental impacts of the higher yields. PD
—From Ohio Ag Manager Newsletter, March, 2007
Carl Zulauf
Professor of Agricultural, Environmental and Development Economics,
Ohio State University
How could higher corn prices affect dairy producers in the long term?
Over time, dairy producers will use their cows to transform inputs, including feed, into milk only if their gross income from producing milk exceeds production costs.
Assuming that the only change is higher prices for corn and other feeds, net return from producing milk will decline. As a result, most dairy producers will reduce feeding intensity. Some dairy farmers will see returns decline so much that they will chose to go out of business, or unfortunately they will go bankrupt. The resulting lower output of milk will cause milk prices to increase to a level that re-establishes a normal return to producing milk.
Thus, in the long run, surviving dairy producers will earn a return that covers all costs and provides an acceptable level of profit. Those producers who survive will have lower cash and variable cost of production per unit of milk or will add value to their milk through marketing activities.
In summary, a permanent increase in the price of feed will lead to a lower level of milk production, assuming no other factors change. Those producers who remain will be less leveraged and more efficient or will engage in value-added marketing activities.
To contact Carl,
e-mail him at zulauf.1@osu.edu
