Using corn to make ethanol as a gasoline substitute never made much sense, except for political reasons, and it’s an especially poor idea in years when the corn crop is suffering. As anybody who reads the papers regularly knows, that would be this year, when drought has damaged an estimated 88 percent of the nation’s corn crop.
The government says food prices will rise 3 percent to 4 percent as a result, but it’s hard to imagine the impact won’t be more severe given the extent of the crop failure, the degree to which the food supply relies on corn and the amount of corn that will be diverted to make ethanol — unless the government relaxes its requirement that consumes roughly 40 percent of the crop.
Midwest farmers love the ethanol requirement because it guarantees that no matter how much corn they produce — and they produce more than anyone else in the world — they’ll have demand for it. And as that demand grows, so will prices — especially in a lean year like this one.
Already, corn prices have shot up to nearly $9 per bushel, about 50 percent higher than just a month ago. Much of the that corn will be used to feed the chickens, pigs and cows that Americans like to eat, but corn is used in roughly one-third of all products sold in supermarkets, including packaging.
So food inflation has already been baked in the cake from this drought — and not just in America. As corn prices worldwide rise, its impact on alternative cheap foods — like rice — will also be felt. This happened with the drought in 2008, and it sparked food riots in countries around the world.
The Obama administration could lessen the impact by relaxing the ethanol requirement, but seems unlikely to because of election-year politics. The farmers that are benefiting from the high prices would turn against him if they fell. But consumers won’t feel the pinch from high food prices until after the election — there will be a lag as livestock farmers will first flood the market with chickens, cows and pigs they can no longer afford to feed.
Winning farm state votes was never worth the sacrifices — mostly environmental — from ethanol. The product not only reduces cars’ fuel economy but damages their engines, and excess corn production has polluted American waterways from the Midwest all the way to the Gulf of Mexico. But this lousy policy will really become a nightmare if the corn crop is the disaster analysts have forecast.
Corn prices wouldn’t fall that dramatically if the government eased its recently raised ethanol mandate. But even if they did, they’d be falling from record high levels.