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Another Summer, Another Food Crisis?
Corn prices peaked during the run up to the 2008 economic crisis at $7.88 per bushel and as the prices of corn and other commodities rose we saw food riots worldwide. Commodity prices soon came back the earth — corn is currently trading at about $4 a barrel. Given that we’re in the middle of an anemic recovery, you’d think spiking food prices are thankfully the last thing we have to worry about.
Not so, say a pair of economists from University of Illinois (via Phil Brasher of the Des Moines Register). In an analysis of past growing seasons, they suggest that commodity corn prices could reach $7 by summer. The reason for the potential coming price spike? Would you believe ethanol?
Scott Irwin and Darrel Good modeled a good- and poor- scenario based on the five best and worst growing seasons since 1960 in the main corn-growing states. They then came up with average yields that could range from 134.5 to 172.5 bushels per acre. Because of the national biofuels mandates, which guarantee that a certain percentage of the corn crop will go into making ethanol, the average farmgate price of corn could be near $5.75 per bushel while daily highs in the cash price could reach the $7 level that occurred during the marketing year for the 2007 crop, the economists found.
Right now, the ethanol mandate is forcing us to take almost a third of the US corn harvest and burn it in our cars’ fuel tanks. And unlike the economic bubble which helped power the last rise in commodities prices, the ethanol bubble still shows no sign of bursting. For better or for worse (well, okay, for worse) a significant chunk of the US food system relies on a low price of corn. If we don’t lose our infatuation with food-for-fuel soon, we may be seeing a new plateau for commodity prices at what we used to consider crisis levels. And that ain’t good.
Clearly, the administration’s continued embrace of biofuels is looking plain idiotic at the moment. Sure, these economists’ may turn out to be wrong, but if they’re not we’ll all pay the price — literally.
The economists go on to suggest that policy makers prepare now for the possibility of price spikes. That they would do so is highly unlikely, however. If the USDA cared about price volitility, it would support re-instituting a grain reserve. With a reserve, the government buys grain from farmers when prices are low and sells it back into the market when prices are high.
One elegant aspect of a grain reserve is that it’s a deficit-neutral — in fact a cost neutral — way of subsidizing farmers since the government is practicing the ultimate investing strategy of “buy low, sell high.” Too bad USDA Chief Tom Vilsack (along with the entire food industry) is on the record opposing — after all, its goal is to stabilize prices at reasonable levels. Did I mention that the US food system relies on cheap corn?
I wonder if they have a Plan B.
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10 Comments so far
Show All$4.00 a barrel corn?
A bushel of corn weighs 56 pounds at a very low moisture content.
Yes, inflated corn prices can be a result of ethanol production. The huge price swings in corn and ethanol caused the second largest producer of ethanol from corn in the U.S. into bankruptcy. Many of the VeraSun ethanol distilleries have been sitting idle since Oct. 2008.
Personally I think the biggest problem with both ethanol and soy diesel is that they both produce massive amounts of livestock feed as a byproduct, which leads to more massive factory livestock feeding operations.
Corn futures markets are not reflecting a spike in corn prices this year.
This article does not address an equally egregious driver of food and energy price fluctuations...the US government providing unlimited money at low interest to an unregulated investment banking industry.
The main driver of the stratospheric increases in food and energy prices in 2008 was Ben Bernanke's lowering of interest rates in September 2007 without regulating investment banking.
BTW: in Illinois, that's GOOD news (my mother used to own a corn-and-beans farm there.)
Burning food in our cars is patently dumb, granted that we've long had "food to burn" - but the world as a whole does not.
I'm with Madhoosier, though: first, the economists' calculations are likely a pipe-dream; second, redirecting the American "food system," based on factory feed lots, would be a good thing.
Unfortunately, racking up the price of grain (they all go up with corn) causes mass starvation, so it's not a good way to reform our food system.
Don't forget about he govt subsidies to the large agribusinesses who are paying slave wages to the sharecropper corn growers while the Con (against) Agras (agriculture) of the country take both the inflated grain profits and the govt welfare. Talk about double the profit margin. I see another Double Bubble growing....and that brings us to another inflating bubble, healthcare.
How much more irresponsible can a government be than to redirect a third of its maize to bio-fuels while eliminating the grain reserve program? The latter sure snuck under my radar.
Have they also eliminated the emergency fuel reserve program?
The resulting price fluctuations may be good for speculators but they sure make it difficult for farmers and businesses in the real world plan for production.
It should also be noted that the production of corn-ethanol requires more net energy input than output and thus does no environmental good whatsoever. Who loves it? ADM, Cargill, et al.
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I had to chuckle at your "radar." The grain reserve program ended around 20 years ago. I used to get paid 26 cents/bu to store corn for the government. It helped keep food prices reasonable and made a farmer's marketing plan a little easier than today's wilder fluctuations in prices. At best, the corn-ethanol situation is rather like a dog chasing its tail. We're busy, but not getting anything accomplished.
Sweet sorghum gives you 10 times as much ethanol as corn. Plant sweet sorghum in unused lawn and yard spaces, and offer to give the home owner a percentage of the fuel made from the crop yield.
Use neighborhood based stills to make the fuel, creating local jobs. That alone would negate any corn impact and give enough fuel to power emergency and city fleet vehicles in every town and city. Cops have to have fuel to jump place to place as our social fabric keeps coming apart.
Corn is hardly the only feedstock that is used to make alcohol fuel (read: ethanol)... try reading some history. Henry Ford hated gasoline and knew it was a toxic, finite fuel source. John D. Rockefeller had alcohol knocked off the market as a competitor using Prohibition as a cover.
A 5th grader could make better policy than present law makers and bankers.
Ethanol rocks.
One problem is that it takes about as much energy to raise, harvest, ferment and distill a gallon of ethanol and the gallon of ethanol releases when it is burned. If you are going to go to that much trouble, maybe adding a little branch water and sitting on the back step with a glass in your hand is a better way to go. Oh yes, you can age it, and it gets better.
As far as ethanol goes, swap out corn for sugar beets which will give a yeild equall to Sweet Sorghum. About ten times that of corn.
Thanks for your post Greg R. I must not have been paying attention, as the idea of an actual food "shortage" in this country is a bit hard to fathom. But given Washington these days, who knows...
Also, given the posts here on alternative sources, like sweet sorghum and sugar beets, the corn-ethanol subsidy sure looks like a boondoggle. I understand that Brazil uses cane sugar, which I've read also produces a higher yield. I've also read that the facilities designed to produce ethanol from corn are not easily converted to handle alternative fuels.
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