The Rising Tide of Corn

With corn prices roughly twice their usual level, the cost of feed is up, and with it the price of milk, cheese, beef and many other agricultural commodities. (By Justin Sullivan -- Getty Images)

To be sure, the higher grain prices are not the only factor causing increases in food prices. In the case of milk, Chris Galen, a spokesman for the National Milk Producers Federation, said prices are up -- locally they have jumped 30 cents from January to May -- partly because of an increased demand for exports to Asia because of the rapid economic expansion there. Also, Americans are eating cheese with zeal. About 45 percent of the nation's milk is used for cheese, up from 29 percent in 1980.

Even though other factors help increase food prices, the industry seems to be particularly concerned about ethanol. A number of key players -- ranging from H.J. Heinz to PepsiCo to the United Egg Association -- have responded to the recent energy debate by sending a long letter to Senate Majority Leader Harry M. Reid (D-Nev.).

"Rapid development of the corn-based ethanol industry is already having adverse impacts on food supplies and prices, a major concern for many consumers," the letter said. "In addition, the continued aggressive expansion of corn ethanol production diminishes the availability of soybeans and other crops that provide healthier oils."

The question now is: Are the new corn prices here to stay? Rick Tolman, chief executive of the National Corn Growers Association, predicts corn prices will level off, particularly because of a glut expected to hit the market this fall. Farmers have planted 90.5 million acres of corn, the most since 1945, according to the USDA.

Tolman said, "Farmers have a way of, every time prices go high, they almost always overproduce until they drive down the price to the marginal level where they can't make any money anymore." He said corn farmers are "price takers. You have to take what the market offers you. The market bids the price up or down depending on what it thinks the supply is."

Ergo, if buyers think the supplies are high, they can offer less per bushel.

But Darin Newsom, a commodities analyst for DTN, an agriculture and energy research firm based in Omaha, isn't so sure that supply increases will lead to lower prices.

"That's an old economic rule," he said, "but it's only true if we are in a supply-driven market. Right now we seem to be in a demand-driven market," meaning the sustained focus on ethanol could keep prices up.

"A demand-driven market will create a long-term change in price," he said.