Drought, Corn and Consumers

Based from the article from CBC News, entitled ‘How the spike in corn prices will hit consumers’, written by Daniel Schwartz on 21^st August 2012, the worst U.S. drought in half a century has obviously driving the corn prices up and left consumers wondering what the impact will be on the things they buy. There has also been a terrible heat wave in the United States that has taken number of lives as well as corn crop. This indicates that the price of the corn will continue to rise in short term. In the long term, the price for oil will eventually rise as the demand taken up from global growth. This resulted in more corn will be converted to ethanol and this will further increase the price of corn.

Before we going further in this article, let’s look how demand and supply works. When there is other factors influence on buying plans other than the price of the good changes, there is a change in demand for that good. When there is other factors influence on selling plans other than the price of the good changes, there is a change in supply of that good. The rapid increase in the price of oil and gasoline has boosted the demand for ethanol, an alcohol-like substance that is blended with conventional gasoline. The increase in demand for ethanol has drove up the demand for corn (D1 to D2). But at the same time, the drought has caused decrease in corn stocks (S1 to S2). Meanwhile, equilibrium is a situation in which opposing forces balance each other. Equilibrium in a market occurs when the price balances the plans of buyers and sellers. But as the demand increases, the supply decreases, market equilibrium is affected. The demand curve has shifted to the right; supply curve has shifted to the left. There is an increase in equilibrium price (E1 to E2). 

More and more consumers will keep looking for cheaper and better alternative to fuel their vehicles. Oil prices have increased rapidly. With the new technology that is developed to make the ethanol produce significantly less impact on environment than gasoline does, there is a much larger demand for ethanol as a substitute for oil-refined gasoline. Furthermore, governments have mandated least amount of renewable fuels being blended with gasoline laws. The United States has 10 per cent mandate for the amount of ethanol that needs to be added to gasoline. To look at other countries: Minimum content for renewable fuels to be blended with gasoline for Canada is 5 per cent; 7.5 per cent for Saskatchewan; 8.5 per cent for Manitoba. The higher demand of ethanol encourages more demand for corn. But of course, not all corns will be used to be converted into ethanol. The National Corn Growers Association says a third (38%) of United States’ corn is destined for ethanol to be fed to cars. But since those same cobs in corn get made into ethanol and animal feed (distiller grains), they have noted that 29 per cent of the corn crop are used for ethanol; the remainder 9 per cent goes to animal feed. Thus, ethanol production in the U.S. consumes a significant amount of corn and has put on large affect to corn prices.

The rises in prices for corn has put a pressure on other food prices such as chicken, dairy, eggs, beef, etc. The United States Department of Agriculture has projected that the food prices in the U.S. will rise 3 to 4 per cent in coming 2013. On the other hand, Sylvain Charlebois, the project lead of the University of Guelph's Food Retail Price Index, has forecasted that the food prices in Canada will increase by no more than 4.5 per cent. People will notice the difference in their grocery bills. Why? Because of rising in feeding cost for animals to produce these type of foods. It takes 7kg of maize to produce 1kg of beef and if the levels of meat consumption were to arise, the demand for corn by ranchers will far exceed than what the producer could supply. As most of us already know that certain countries like in Asian, they treat meat as luxury food rather than normal food. Thus, it’s not just about the price of corn we should concern about; it’s about the price of other goods that feed on the corn or should we say corn reliant. These are the times where the demand for food is rising. But what of countries that depends on food where it makes up a larger chunk of family budgets? Many of the poor depend on the agriculture to support their living. But a spike in food prices merely jacks up the cost of living without generating much in the way of income or jobs in the short term. And for the urban poor who make up an increasing slice of most emerging-country populations, higher food prices are almost entirely bad news.

To give extra opinions about the article I picked and analysed from the CBC News, since the drought has become a proximate cause of reduced corn stocks, the production of ethanol should not be given a priority. People can always look for better alternative to replace gasoline such as switch to electric cars and public transports; leave the gasoline for high incomers to use. This will not just reduce the level of pollution in air but helps in clearing road traffic as well. Ethanol utilised great amount of corn stocks and leave the harvested crop less for other sectors. If United States were to reduce the production of ethanol, the large remainder of the crops can be used more for animal feed and food production, with slight increase in price than original price (if it weren’t for bad weather). I couldn’t agree more with Patrick Burns, an analyst in New York with Panjiva, a provider of global trade intelligence to businesses around the world has seen reasons why corn prices don’t give much impact on retail consumers. He has mentioned that stocks such as rice and wheat are pretty abundant. Both of these serve great alternative for consumers to switch from corn.

Posted by Amir Faisal.