Matthew’s Note: Please welcome I, Pandora’s newest author, Paul. He has a brief bio on the about page, and the link there will show you all his posts as he continues to contribute here on I, Pandora. Here’s Paul’s first post:
As I was making one of our annual trips with my family across Kansas, I noticed something startling. Now when driving across Kansas, generally anything different is good. However, as I reflected upon this change I realized that maybe it wasn’t for the better. What is that change?
Instead of the usual wheat I had seen for the past ten years trekking across what may be the flattest and most boring state in the Union, I saw fields and fields of corn!
This was not limited to a couple fields here and there; nearly the entire state was covered in corn. Why the change? Well the short answer is government ethanol subsidies and mandates.
In the past several years most of our politicians, president Bush included, have argued that America is “dependent” on foreign oil and must seek alternative fuel sources. And instead of letting the market and individuals decide whether it is cost efficient and necessary to develop new fuel sources, the federal government has offered enormous subsidies (billions of dollars) for researching how to develop and produce ethanol to supplement, and ideally replace, crude oil.
They have also begun to mandate that gasoline sold in the U. S. must have a certain percentage of ethanol added to it.
Now what does this have to do with corn in Kansas? Well, in case you didn’t know, the main ingredient in the production of ethanol is corn. As lucrative government contracts and subsidies are offered, companies are chomping at the bit to try their hand at developing and producing ethanol. To do this, they need to buy corn. Lots of it. For anyone who knows nothing about economics, the price of a good is determined by two things: how large the supply of the good is and how large the demand of the good is. The higher the demand for the good is, the higher the price will be.
With the huge demand for corn generated by the new ethanol companies, the price has skyrocketed and is at its highest point in over a decade. As you can guess, if the relative price of corn to wheat doubles, farmers will stop growing wheat and start growing corn instead because they can make a much larger profit. Hence the fields of corn in Kansas instead of fields of wheat.
So why care that farmers are switching from wheat to corn? Well there are a number of results that directly affect you.
First, the price of corn has increased by quite a bit. This means that when you walk into your local grocery store instead of being able to buy five or six ears of corn for a dollar, you have to pay two or three dollars instead. So, people won’t have quite as much corn as they had before.
Second, corn is used to feed livestock (cattle, hogs, chickens, etc.). So as corn prices rise, the cost of feed also rises. This means that chicken and dairy farmers have to pay more money to feed their animals. They then raise the price of their products to cover this additional cost. So this explains, in part, the increasing prices for milk, cheese, eggs, beef, chicken, etc.
Third, this is the part that involves the switch from wheat to corn. Now that more corn is being grown, we can expect the price to decrease or stay the same depending on how much demand continues to increase. However, we have less wheat. That means the price of wheat will increase. What is made out of wheat? Bread, bagels, pie crusts, pasta, pancakes, muffins, cupcakes, biscuits, crackers, pretzels, buns, and anything else made with flour. These will all increase in price when their main ingredient increases in price.
“Why are we using food to fuel our cars?” This question has been bandied about by critics, economists, and others in relation to ethanol. Why indeed? Would it not make more sense to use something that cannot be put to another valuable use, such as crude oil? If you think about it, the ethanol subsidies are funded by our tax dollars. So in effect, we are paying billions of dollars to increase the price of our groceries.