What is in this article?:
- The livestock industry and others that use corn as a key input are calling on Congress and the administration to modify or suspend the ethanol mandate for the 2012 corn crop.
- Corn farmers, on the other hand, are concerned that a change in the ethanol mandate may collapse prices just when they are facing a reduced crop.
- Current high prices may trigger increases in production that could result in extremely low prices in the future.
And so they began to cast about for uses that did not involve food products. They looked at converting corn starch into clothing fibers—it works. They funded research into using corn to make glues that could be used in the fabrication of a wide variety of industrial products. And they looked at ethanol.
That corn could be used to make ethanol was a no-brainer. Whiskey makers had been doing it for centuries. (Note: In the years following the American Revolution, whiskey making by farmers living west of the Allegheny Mountains triggered what became known as the Whiskey Rebellion as farmers protested a tax on whiskey. During that period, Western farmers converted their grain to whiskey before transporting it over the mountains because it was a less bulky, higher value product and equalized their competition with farmers east of the Alleghenies. The tax to pay off the American Revolution war debt put them at a disadvantage with Eastern farmers who were closer to major urban markets, and so they rebelled against the new government of George Washington.) And, unlike the other non-food products, production of ethanol as an automotive fuel oxygenate could be ramped up very quickly. Given the sustained low prices, quickly was good.
Corn farmers began to organize meetings to set up ethanol plants. To fund the ethanol plants, we saw farmers plop down a $10,000 investment in shares of an ethanol co-op for the right to sell 10,000 bushels of corn to the co-op at a 2 to 5 cents per bushel premium over the local market.
It looked like a fool’s investment, but, with sub-$2.00 per bushel corn, their backs were up against the wall. As it turned out, hurricanes in the Gulf of Mexico, the discovery that a competing fuel oxygenate was carcinogenic and was leaking into the groundwater in California, and a war in an oil-producing nation in the Middle East made the investment look brilliant in retrospect. A bit of sustained lobbying for an ethanol mandate didn’t hurt.
It did not take long for non-farmer investors to see the money that was to be made in ethanol production, and soon the use of corn for ethanol production went from a number close to zero to 5 billion bushels a year.
What policy instrument do both parts of this story have in common? Grain reserves, well more precisely, the lack of grain reserves.