The rising price of corn from ethanol demand has been a boom for farmers in the rural Midwest, but price increases is not good for everyone. Traditional grain consumers are hurt. Of course, we may not care about the increasing cost of high fructose corn syrup used in soft drinks, but there are others for which corn is a dietary staple.
The rising cost of corn in Mexico has made it significantly more expensive for poor consumers to obtain food basics. The higher cost of grain will also increase the cost of protein in the form of meat. Granted this cost increase is a little more complex because the residual from ethanol production can be used as high protein feed, but cattle costs will be higher. Milk is also affected. Milk demand is increasing significantly and supply is not matching the increase because the cost of adding to a herd is high. Milk prices are up 60 percent in the last six months at the CME and feed represents half the cost of production. The environmental damage will also increase because one of the greatest harms to the environment is when forest or grasses are destroyed to increase the amount of cultivated land.
We will not review the economics of ethanol production which is heavily subsidized at 51 cents per gallon. Food consumers are paying for the ability of others to drive their cars with higher octane. The demand shock from biofuels is real and will not be eliminated through a one time increase in supply. This will be the most important issue driving commodity prices in the next year.
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