On July 30, The Guardian reported that the severe droughts across the agricultural areas of the United States have led the nation's meat, poultry, and diary producers to insist that the EPA to suspend this year's quotas for corn ethanol production. The U.S. government's forecasted 4% rise in food prices due to the drought has sharpened criticism of the government's ethanol quotas.
The harsh conditions caused by the drought in the midwest have led a growing number of farmers to sell livestock early for fear of the increased cost of feeding them, given that corn makes up a majority of animal feed.
According to research by the New England Complex Systems Institute, "while the behavior (of prices) could not be explained by supply and demand economics, it could be parsimoniously and accurately described by a model which included both the conversion of corn into ethanol and speculator trend following."
The warning given to the government notes that continued "misguided" food-to-ethanol programs, combined with the commodity speculators adding fuel to the fire, will lead to a massive crop shock.
If the EPA does decide to relieve farmers of the ethanol quotas, the effect it will have on gas prices might not be as drastic as the effect not lifting quotas will have, but it will be a major setback the only program that has really helped shift our dependence on gasoline away from fossil fuels and toward biodiesel.
The rise in prices caused by the drought will likely pinch the budgets of low to middle-income families, an event which would have massive economic ramifications, given that the lack of consumer spending has led many businesses to hold onto cash reserves instead of reinvesting them. If the government really wants to try to keep this economic recovery moving in the right direction it would be a good idea to shield the middle class from increasing expenses until economic investment and wages start growing again.
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Comments: 4
Corn converted to ethanol does not give back 90% of the nutrition value. The feed byproduct is only about 30%. This is included in our analysis. See
L. Hoffman, A. Baker, Market issues and prospects for U.S. distillers grains, FDS-10k-01 Economic Research Service/USDA (2010).
and Figure 3B of
M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, Yaneer Bar-Yam, The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion. arXiv:1109.4859, September 21, 2011.
Best,
Yaneer
http://necsi.edu/research/social/foodprices.html