9/10/2007

The Rising Tide of Corn

This article was published in the Washington Post.

The rising cost of oil has increased the cost of gasoline. With that rising cost, consumers have pushed for alternative forms of fuel. Scientists have finally produced a substitute for gasoline known as ethanol, but the unintended consequence has been that the price of food products are rising dramatically. Ethanol is a green, or clean burning, fuel made from corn. With the increase in demand for corn, farmers are having to pay more for the feed used to raise their animals. In turn, the costs of milk, eggs, meat, and cereal are all increasing as a direct result.

This article is a great way to see a very direct and obvious shift in the demand curve. In the beginning corn was seen as a viable option to create a green fuel, since it was a renewable resource. Only after the fact was it made evident that an unusally high demand would be placed on corn and the effects it would have on prices in the food industry. Now we are seeing the dramatic effects.

One other thing I wanted to point out is that the market had a shortage of corn, which increased the prices dramatically. To take advantage of this, farmers have planted millions of acres more to keep up with the demand. The market will reach an equilibrium, and the rising cost of corn will eventually level out.

10 comments:

Dr. Tufte said...

There is a book called "Economics In One Lesson" whose point is that economics is all about studying the extended chain of consequences of our actions.

This is another case: we divert corn for fuel, and no one talks about what this will do to the price of everything else.

No one talks about the other effect either: to the extent that we do get people to switch away from using oil for power, plastics will get much cheaper. I don't think the greens have realizes yet that they are pushing to fill our landfills faster.

There are a couple of factual mistakes here that need to be corrected. Ethanol hasn't been "finally produced"; it's been around for longer than gasoline. Ethanol is also not clean burning - it is just as polluting as gasoline.

True, ethanol is a renewable resource, but it has been shown that producing it from corn is not economical at current prices without subsidization. Scientists are looking at other plants as better sources of ethanol, but those plants are not backed by the farm lobby.

Trivia 1: Soap and candles are other products whose price is going up because corn is used extensively in their production.

Trivia 2: Mexico had to institute and economic no-no, a price ceiling on tortillas, because Mexican corn was being exported to the U.S. where it could get a higher price.

Hayden said...

Another interesting statement in this article is that farmers are switching from soybeans to corn because of the demand for corn. With the shift in supply of soybeans decreasing and a high demand for soybeans, the prices for soybeans will possibly increase because of a shortage of soybeans and a high demand for them. Is corn really the solution to providing a cheaper alternative to oil? In the long-term, it seems ethanol will be just as expensive as oil if corn is its main source. What do you think?

Timothy said...

Isn't it interesting that instead of just drilling for oil in our own country where we still have vast reserves of oil and others that are undiscovered, we would rather try and come up with substitutes that cause other economic problems that make other items more expensive for the public anyway.....It just seems like we are chasing our tail and don't care much to stop and use our brain.....or our already discovered oil. Perhaps the inconvient truth in all of this is that there is no really good substitute for oil yet and we should continue to drill and use the oil in our own country to alleviate the price problems we find at the pump as well as the more expensive corn products we find in our world, until a good substitute can be found.

Dominic said...

I agree with Timothy in that we should start using our own oil reserves, but at the same time I think that this transition should be a temporary move until we find a good substitute for gasoline. I feel confident that there is a good substitute just waiting to be discovered. Energy and transportation come in many different forms and I'm sure that we will find a good match when it is absolutely necessary.

Wyatt said...

I agree with Timothy that we need to capitalize on our own oil reserves for now. I feel the amount of oil in those reserves is far greater than anticipated. Maybe when oil prices hit $100 a barrel there will be more political pressure to open up new exploratory drillings in Alaska.

Dr. Tufte said...

The political winds don't seem to be blowing in the direction of encouraging domestic extraction. That seems unusually profligate when you stop to think about it.

There are other laws that could be reconsidered too. My favorite is the "make work" law that requires any non-producing well to be backfilled with concrete: even though "non-producing" is a function of the price at the time, and not the potentially higher price in the future.

Sophie said...

One would think that with all of the technology and education that the citizens of the United States have, that our country would be able to come up with some form of alternative fuel. Even though scientists have discovered ethanol, as can be seen from this article, it is not working any better than our current energy form. Either the government really needs to start investing in the research and development of alternative fuel sources, or it needs to start drilling for oil in our own country.

Dr. Tufte said...

Another way of thinking about this is: maybe oil/gas is better fuel than we recognize.

William said...

Dr. Tufte,
It seems to me that we are always so anxious to find a new way to produce gas, yet many times we overlook the consequences of the other methods. Here we are trying to fix one problem, yet creating even a further problem. It is so important that we look at all the consequences and not get up in just the advantages that are created.

Dr. Tufte said...

-1 on William for poor grammar.

This is kind of the point of studying economics though - looking for unintended consequences.