If this is what we get in a good year, what will happen when we have a bad crop?
American consumers are starting to see some of the consequences of our ill
-fated ethanol policy in the prices of everything from meat to ice cream. While well-fed Americans may gripe, the implications for those in sub-Saharan Africa are quite alarming.
All of these concerns arise from the higher average price of corn that necessarily results from an increase in the use of the corn crop for ethanol production. But another issue well worth considering is the effect on the volatility of corn prices.
Food prices naturally are quite volatile because unpredictable and uncontrollable variation in weather can produce a bumper crop one year and a big shortfall the next. Usually consumers are able to mitigate somewhat the consequences of the volatility of supply by switching between foods depending on what is most cheap or expensive at the moment. However, whereas the demand for food is relatively price elastic, the demand for gasoline is quite inelastic. If the quantity of ethanol demanded does not fall much when there is a bad crop, the quantity of corn used for all other purposes must make an even bigger proportional adjustment. For example, if 1/2 of our corn crop were devoted to ethanol production and ethanol demand were completely price inelastic, a 10% reduction in corn production would require a 20% reduction in use of corn for other purposes.
A recent analysis by University of Illinois Professors
and Scott Irwin
notes that over the last half-century, corn-production shortfalls as big as 30% are not that uncommon. Very inelastic demand means that having a stable, reliable source for fuel is a very high priority for consumers. Having the supply for such a commodity depend on something as volatile as U.S. corn production does not seem like such a brilliant idea.
Now this raises a potentially big problem for the U.S. Congress, and I’m not sure how they’re going to solve it. Specifically, the question they might want to be mulling over now is, When the next 20% shortfall comes, at whom will they point the finger of blame?