The Free Press
May 07, 2008 01:09 am
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Political leaders in the U.S. are finding out that when you play with the laws of supply and demand, you may get burned.
Some political leaders have already felt the heat and are looking to soothe the burn of high corn prices and unprecedented food inflation. Republicans in the U.S. Senate, including presidential candidate John McCain, are calling on the Environmental Protection Agency to use its regulatory authority to reduce ethanol mandates passed into law by Congress. The idea being that this will curtail the steep run-up in food prices.
Of course, the ethanol mandates were designed to reduce the steep run-up in the price of gasoline.
The growth of ethanol as a fuel and its mandated use has been seen as the cause for higher corn prices and the resulting increase in food prices around the world. But ethanol is only part of the equation. A sharp increase in demand for meat such as pork from major countries like India and China have bolstered the demand for corn, the main feed for hogs.
The International Food Policy Research Institute says the biggest factors driving up world grain prices are growing global incomes and demand for food from large countries. Farmers have been responding to these world forces for several years. U.S. farmers, in particular, increased the total corn crop by 45 percent since 2002 and the amount for use as feed and food by 34 percent.
Others, including the World Bank, argue correctly that the recent gain in corn production from 2004 to 2007, about 1.3 billion bushels in the U.S., has all been used for ethanol.
But it’s hard to imagine what would happen to oil prices should the ethanol mandate now be taken off the table. Politicians should remember that corn futures prices are regulated more closely than oil futures prices. Experts have testified before Congress that speculation can account for nearly half the price of $100 per barrel of oil. Corn markets are driven by many more players than oil markets, simply because every farmer has some connection to commodity prices. Oil is controlled by a few major suppliers.
The market, of course, speaks loudest. Right now, the price of corn is telling farmers to grow more corn. The demand for ethanol is part of that signal. But we should also remember that ethanol prices would come down and demand could be reduced if the U.S. would remove or at least reduce the 54-cent per gallon import tax on ethanol from Brazil.
Of course, political leaders don’t remove the import tax because that will further irritate ethanol producers and farmers.
Trying to impact the economics of grain and oil and ethanol with politics will be a risky game at best and one, at worst, that could have disastrous and unintended consequences. Government should help markets work by making sure the playing field is level, encouraging and promoting competition and removing artificial barriers to trade. Removing the ethanol mandate will likely have volatile consequences on the food and oil markets.
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