The Dog Still Wags the Tail, For Now

The United States remains the world's largest corn producer and currently exports about one-fifth of annual production. Corn has always been a major component of livestock feed, but is also processed for human consumption (glucose, starch, and oil) and industrial uses (alcohol and ethanol). Chemists are further developing
new industrial products from corn starch. Given the wide range of possible uses for corn products and because of tremendous technological advances, corn is at the heart of the increasing industrialization of the U.S. grain system.

Unfortunately, the market for food made from commodity corn is mature (USDA-ERS), and food uses for corn are expected to expand only at the rate of population growth. Differentiation of corn through specialty or identity preserved (IP) markets may, however, open new markets for corn. In fact, the specialty corn market increased from
3.3% of total U.S. corn in 1996 to 10.9% in 2000 (U.S. Grains Council) and because of advances in corn processing and increased consumer demand for differentiated products, these trends are expected to continue. U.S. corn growers will be faced with an increasingly intermixed market where specialty/IP corn coexists more often with the generic standard commodity corn.

Price premiums of specialty/IP corn types relative to commodity corn also vary from year to year depending on factors such as crop quality, and the presence and type of production contracts. The quality of the crop has a significant impact on price premium, particularly if specialty corn types are produced without contracts. Under
production contracts, price premiums depend on the contract type. Base price (market) plus a premium is a very common and straightforward contract type, but unfortunately leaves the producer with all price and yield risks.

The variability of price premiums from year to year, and the reliance on production contracting are also reflected in higher variability in supply and demand for specialty/IP corn compared to commodity corn. This is evidenced by findings of the U.S. Grains Council survey that show the high degree of entry and exit of farms in and out of specialty crop production. The key factor drawing farmers in and out of specialty corn is the price premium and the relative returns compared to commodity corn .

Recently, the USDA released results of a study (Elbehri and Paarlberg, 2003) to evaluate price and market behavior between commodity corn and specialty/IP corn. The objective of the study was to explore the price and market behavior of a corn market under product differentiation and identity preservation.

Results from this USDA study suggest that given its dominant market share, changes in commodity corn have greater impact on specialty/IP corns than changes in specialty/IP corns have on the commodity corn market. Specialty/IP corn markets must expand greatly before they will generate large positive spillover effects on
commodity corn. Therefore, as specialty/IP markets expand, they will have greater effects on the commodity corn market, and thus become a driving factor in corn market pricing structure. But for now the dog still wags the tail.

For more information on the article above please contact Andy Kleinschmidt of the Ohio State University Extension Office in Van Wert County at kleinschmidt.5@osu.edu or at 419-238-1214.

REFERENCES
Elbehri, A., and P. Paarlberg. 2003. Price Behavior in Corn Market with Identity Preserved Types. American
Agricultural Economics Association Annual Meeting, Montreal, Canada.
USDA-ERS Briefing Room, Corn: Background [online] http://www.ers.usda.gov/Briefing/Corn/background.htm