Posted on Mon, Mar. 03, 2008
Experts fear 'corn shock' ahead for economy
By JERRY HIRSCH
Los Angeles Times
The nation’s growing dependence on corn in fuel as well as food could put the nation in perilous economic straits in the event of a Midwestern drought, economists say.
“We are replacing price volatility from the Middle East with Midwestern weather price volatility,” said Michael Swanson, a Wells Fargo & Co. vice president and agricultural economist.
Corn is a key element of the U.S. food supply. Dairy cows eat it to make milk, and hens consume it to lay eggs. It fattens cattle, hogs and chickens before slaughter. It makes soda sweet. As the building block of ethanol, it is now also a major component of auto fuel.
Analysts warn that a “corn shock” could lead to $5 gas and $3.50 eggs as the effects reverberate across the economy.
It could happen as soon as this summer.
“The risk of a drought right now is higher than normal because of the La Niña we are seeing,” said Bruce Babcock, an agricultural economist at Iowa State University, referring to the cooling of ocean temperatures that often has a drying effect.
Such would occur against a backdrop of soaring prices for basic food items and other commodities that are already stressing the economy. Coffee, platinum and oil prices are already up dramatically.
After a torrid 2007, corn prices have risen an additional 20 percent this year because of global demand for livestock feed, sweeteners and ethanol. The rush by American farmers to forgo other grains to plant cash-producing corn, along with weather problems, has squeezed wheat supplies, pushing the price of that grain up 21 percent. Soybeans have risen 25 percent.
Analysts are already simulating what would happen if a drought hit the Corn Belt. Babcock estimates that corn could reach $8 a bushel from $5.46 now.
As any farmer can tell you, Mother Nature is fickle. The U.S. has suffered four major weather disasters since 1971 that wiped out 21 percent to 29 percent of the corn crop at a time.
Bad weather, including droughts, scorching heat waves and cold, cloudy spells at just the wrong time, has reduced harvests by billions of bushels. Previously, these disasters have raised food prices. The next drought will be the first to affect gas prices.
That’s because ethanol — mostly refined from corn — will make up about 6 percent of the nation’s gasoline supply this year, and that’s expected to rise to 10 percent over the next five years.
But if there were a crop shortfall, the rising price of corn would prevent ethanol distillers from earning a profit, prompting them to slash production, Babcock said.
Oil companies would have to scramble to fill that sudden gap with conventional gasoline. Prices would soar for both fuels, said Philip Verleger Jr., an energy economist in Aspen, Colo.
“One way to see this is to look at what happened last year,” Verleger said.
Industrial accidents and other refining disruptions cut U.S. gasoline production about 10 percent in February 2007, sending wholesale prices soaring, he said.
Farmers are also worried about what could happen in the short term.
“A drought would be bad for everyone. The high prices would hurt my customers, and I would have no crop to sell,” said Ron Heck, a fourth-generation soy and corn farmer from Perry, Iowa.
Blame oil companies for part of the problem, said Matt Hartwig, spokesman for the Renewable Fuels Association in Washington.
“The oil industry has just not made the investment in refineries to keep up with the demand for gasoline,” Hartwig said.
As demand for gasoline outstrips refinery expansions, fuel prices will be linked more tightly with the size of the corn crop.
“You might see a point where even the threat of a drought could cause gas prices to rise,” Wells Fargo’s Swanson said.
Lester R. Brown, an author and president of the Earth Policy Institute, sees a different scenario, one with global implications.
He estimates that as long as oil prices continue to hover around $100 a barrel, ethanol distillers could pay up to $7 a bushel for corn and still make money.
However, Brown said, “if the ethanol producers stay in the market, that will disrupt the food supply.”
He added: “Because of the interrelationships among crops, a major shortfall in the U.S. harvest could tip global grain and soy markets into chaos.”
It would affect the prices of food made directly from these commodities, such as bread, pasta and tortillas, and food made indirectly, such as pork, poultry, beef, milk and eggs.
If it happened this summer, it would be especially bad because of the current pace of global food inflation.
“The rest of the world is less able to pay high prices for food. What’s annoying for us is life-threatening elsewhere,” Brown said.
http://www.kansascity.com/news/nation/v-print/story/514388.html
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Fri Mar 14, 2008 11:30 am