Drought Fuels Corn Woes
Ethanol needs adding to pain for livestock feeders
The blistering U.S. drought has sparked a heated debate over whether the ethanol industry should be sacrificed to spare livestock feeders and food processors from crippling corn prices. They're asking whether corn needed to feed people and animals should be going into fuel tanks. It's a tough one to answer, but is it even the right question?
Back in the days of $3 corn, it seemed like a good idea to turn it into ethanol, even if it took a few subsidies and a legislated mandate that gasoline has to contain a minimum percentage of ethanol.
Not only would this boost prices by eliminating burdensome carry-overs, it would partly diversify the U.S. away from imported energy and create rural jobs at ethanol refineries. Even though its status as "green energy" has always been controversial, it seemed like a win-win-win policy decision.
By any measure, you'd have to say the policy worked. Today, as much as 40 per cent of U.S. corn goes into ethanol, and prices of late have topped $8 with the potential to go higher.
But with drought tightening supplies, other users are suffering. Unable to afford feed, livestock producers may have to sell their herds, which means higher meat prices. And given most of the food we eat contains corn or one of its derivatives, food prices generally are set to rise as this weather disaster works its way through.
These developments have global implications. The U.S. is the world's largest corn exporter. Even here in Canada, the hog industry has been thrown into another tailspin by rapidly rising feed prices.
The UN is poised to call an emergency summit to discuss the implications of rising food costs. It is pushing the world's poorest down the food chain, and has a politically destabilizing effect at a time when many governments are already wobbly.
Demands are growing for the ethanol-blending mandate to be reduced or waived until the supply shortage has passed. But is the problem ethanol or a lack of buffer stocks?
The free market philosophy shuns the idea of maintaining emergency stocks because it dulls the ability of price signals to regulate supply and demand.
It's true that in the past, the vast surpluses accumulated under European and U.S. farm policies were counterproductive. Governments of the day were propping up domestic prices by buying up the excess supply and either storing it, giving it away as food aid or eventually dumping it on the world market in a failed attempt to buy market share. …