There's been some talk about the competition for grain between ethanol producers, livestock operations and people this week. A number of blogs picked up on the comments of Mexican president Felipe Calderon about the rising cost of corn, a staple of the Mexican diet, especially for poor people. Dave Halliday has been on the story, quoting a CBS News article.

President Felipe Calderon signed an accord with businesses on Thursday to curb soaring tortilla prices and protect Mexico's poor from speculative sellers and a surge in the cost of corn driven by the U.S. ethanol industry. . .

Tortilla prices rose by 14 percent in 2006, more than three times the inflation rate, and they have continued to surge in the first weeks of 2007.

The rise is partly due to U.S. ethanol plants gobbling corn supplies and pushing prices as high as $3.40 a bushel, the highest in more than a decade.

There may be other issues as well.

Wall Street commodity funds that have been investing heavily in energy futures are now loading up on agricultural commodities like corn and livestock futures.

The flood of investment has raised concerns among grain traders and agricultural producers that speculative money is gaining an undue influence over their markets, which help set the prices of raw commodities for a host of consumer food products. . .

The commission found the Wall Street funds control a fifth to a half of the futures contracts for commodities like corn, wheat and live cattle on Chicago, Kansas City and New York exchanges. On the Chicago exchanges, for example, the funds make up 47 percent of long-term contracts for live hog futures, 40 percent in wheat, 36 percent in live cattle and 21 percent in corn.

“These are jaw-dropping numbers,” said Dan Basse, president of AgResources, an agricultural research firm in Chicago. “We have seen this explosion of open interest in agricultural commodity trading, and now we know it is largely related to the commodity index funds.”

The index funds may be stoking volatility, traders and analysts say, because the agricultural markets tend to be far less liquid than other commodity markets, like energy. Such volatility could lead to higher prices for buyers and sellers of agricultural commodities, including food at the grocery store.

Dave has been following the impact of ethanol on the dairy and beef industries too.

Dairy farmers are staggering under significantly higher corn prices and wondering how they're going to adjust to the sea change fueled by ever-increasing demand for corn for ethanol production. . .

Feedlots are already paying lower prices for 400- to 500-pound feeder steers because it will cost more to feed them up to sale weight.

“Prices in Utah were $1.49 per pound in early 2006,” Holmgren said. “Prices now are at about $1.15. Prices for finished cattle are down, too.”

The price was $93.50 per hundredweight for finished steers a few months ago. The latest price is about $84.50 per hundredweight.

This is coming at a time when many producers were rebuilding their herds because of recent strong beef prices.

Dairy is hurting. They were already having trouble and this is on top of other woes. My buddy Marty is a feed salesman, mostly to dairies, and he has had to raise his prices steadily. He's advised the dairymen to buy while it was cheap since prices would continue to rise, but had few takers.

He and my other Buddy Jared, a long time beef cow/calf operator, have a small feedlot side business where they finish some steers and raise some replacement dairy heifers. I told them a year ago that this was coming and that they should aggressively switch away from corn to byproducts from the fruit and veg packing industry, and try to get a better handle on distillers grains and effluent from the ethanol plants. They thought it was just another crazy back40 story then. Not now.

I also told Jared that he should focus on grass, lease more land and tune up his grass management skills, because grass would be more valuable when corn was no longer cheap. He's done that some, as much to shut me up as anything, but he's glad he did now.

My prediction is that the cost of beef will rise as the cost of corn goes up, but not enough to make up for the cost of feed. This will drive the light feeders (400#-500#) out of the feedlots and back to grass to put on another 300#-400#. This is the more traditional method, the norm until the cost of corn fell so low before the ethanol craze. Cow/calf men would sell light (500#) weaners to stocker operations who would raise them up to finishing weight before sending them to the feedlots for 2-4 months of fattening. The idea was to get most of their frame growth on grass and then just fatten them.

This will make things easier for grass finished beef producers too. Their costs are higher, mostly because it takes a little longer to fatten steers on grass, but their cost of forage can be lower if they are good grass farmers, good pasture managers.

There's an opportunity here. Grass finished products are better for the environment, better for human health, and IMO better tasting to boot. It may become fashionable to eat grass finished meats and consume dairy products from grass dairies. It may break out of the eco-whacko / health-nut niche and become more normal. That's how it was in the day, and there are a multitude of arguments for returning to that standard.