May not be long before a bad summer drought in the corn belt leads to radical gasoline price hikes - as early as this summer if La Niña holds up. The risk offers the prospect of a fantastic 2008 election season. With corn providing 6% or more of gasoline, drought in the corn belt will cause gas prices to soar; citizens will be angry, and politicians will have no one to blame but themselves - or the oil companies! Read the full article for some sage insights from Lester Brown.
Economists are cautioning that the nation's growing dependence on corn would make for a double jolt in the event of a drought across the Midwest: soaring prices not just for food but also for gasoline.This price volatility risk threatens to give a political shock to leaders of both political parties, like a nasty little worm uncovered by sweet corn shuckers (pictured); and, the effect would touch even organic farm products, as every bit of un-droughty acreage is pressed into use for fuel, driving up prices for productive farm land.
Analysts now warn that a "corn shock" might not be far off -- and it could lead to $5 gas and $3.50 eggs as the effects reverberate across the economy.
"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.
Analysts are already simulating what would happen if a drought hit the corn belt. Bruce Babcock, an agricultural economist at Iowa State University, estimates that corn could reach $8 a bushel from $5.46 now.
"The risk of a drought right now is higher than normal because of the La Niña we are seeing," Babcock said, referring to the cooling of ocean temperatures that often has a drying effect.
Bruce Babcock, the cited ag economist, has estimated the levels of subsidies needed to meet Congressional mandates. It ain't pretty. They voted for it, now they'll have to make their beds in it.
The Energy Independence and Security Act of 2007 mandates the use of 36 billion gallons of biofuels by 2022, with significant requirements for cellulosic biofuel and biodiesel production. We calculate the level of tax credits required to stimulate this level of production. Subsidies of nearly $2.50 per gallon to biodiesel and $1.86 per gallon to cellulosic biofuel were required, and long-run equilibrium commodity prices were high, with corn at $4.76 per bushel and soybeans at $13.01 per bushel. High commodity prices are due to intense competition for planted acres among the commodities.
Pandering to the Iowa caucus has unintended consequences, indeed. If you're getting the sense that fuel conservation is the only sensible way forward, you have company.