Economic impact of Diversion of corn crops for production of ethanol

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The effect of corn ethanol, or a personal drought, or other price related factors, on the cost of global goods is difficult to qualify. The change from ethanol to corn crop in America in the past decades has had a great effect on the food prices in America and around the world. There are numerous factors that have had impact on the global food prices though, and the nonlinear impacts on the prices of goods, and prices of gods affect each other, and this has made it quiet hard to determine the major and minor effects (Marshall, 2010). These price dependency and effects of one good’s price change on another has resulted too many theories and facts regarding the prices change in America. The reason being, some good have direct impact on prices of other and other indirect.

According to Glauber 2008, the rise in the food prices has been contributed by the high price in ethanol made from corn. The report produced by the US government indicated that the rise in food prices has occurred for more than eight consecutive months. The food prices have increased by about 5% and the value is expected to rise. The American Agricultural department estimated that food prices would reach 5.5% in 2008 and the estimate was accurate though were few units less. Glauber 2008 says that one of the stated reasons was that the corn price was selling above 8% per bushel. Corn is a stable ingredient in many foods from cola to cereals and the major gradient is animal feed (Glauber, 2008).

The rising corn price is encouraging the reduction of the amount of corn ethanol added to US gasoline. The increase in the corn prices has resulted to almost increase in every food in America and neighboring countries. About 333 million metric tons of corn was estimated to be produced in 2008. Suppose the 31% of the American crop is being used in making ethanol, this indicates that ethanol will use about 103 million metric tons of corn (Glauber, 2008). This further implies that about 13% of the ethanol produced worldwide is being consumed by the Americans. One is left wondering the extent to which the food prices would decrease suppose there was an increase in the supply of corn used for other purposes apart from ethanol production. One of the conditions that might result is the decrease as well as increase in other prices of goods.

The availability of substitutes of corn determines the elasticity of a product; if the consumer can get other products (availability of substitute) it means they can easily change their consumption from one product (corn) to the other especially if there is an increase in price of one commodity. Nicholson and Snyder assert that the degree of necessity of a product also determines the price elasticity of demand. If the product is a necessity then its price elasticity will be greater than that of products which are not necessary. Basic needs have high elasticity of demand compared to luxuries. To some consumers automobiles are not necessary and therefore they are not affected by the changes in the prices (Marshall, 2010).

The time period considered; in a very long period of time, price elasticity of demand tends to be higher. This is because the consumer gets time to adjust after gathering full information about products in the market. The nature of a change; if there is a permanent change in prices consumers will look for ways of changing their consumption bundles (Tucker, 2008). A temporary change will be assumed by many since some usually take a very long period of time to shift their consumption of one product to the other.

The diversion is playing a significant role in reducing corn supplies for food and feed. For example in 2008, the government estimated that 3.1 million bushels of U.S corn was to be sued to produce bio-fuels. That is an increase of about 50% over the 2.1 million bushels the previous year and close to twice the 1.6 million bushels of 2006 (Marshall, 2010). A change in demand can only be responded to quickly if the suppliers have enough stock of inventory or raw materials within his reach. This makes the price elasticity of supply to be elastic. If at all the supply doesn’t keep stocks within his premises (stores). It may take some period of time to produce and ensure that there are enough stocks are kept for future demand. The quantity of stock to be kept can depend on factors like availability of space and he storage cost. These factors in turn affect the price elasticity of supply.

An in increase in the price of corn crops will cause a more than proportionate increase in the quantity demanded. In the real sense, any increase in the price will lead to a fall in the revenue collected by the producer or the price setter. Consumer will immediately lower their demand of the product whose price has been increased. They will switch their consumption to other related products will can satisfy their utility. An example of such products includes bread. In such cases the quantity demanded of bread is relatively elastic. Price elasticity of demand is usually infinity (Mania, 2008).

Any increase in the price of a commodity will cause a less than proportionate increase in the quantity demanded of a product. For example, when the corn prices increase, and following the fact that it is closely tied to the oil prices, when the prices rise, it results to an increase in the demand for ethanol. Under such circumstances, consumers have no option of consuming a given product and therefore will not consider it prices (Marshall, 2010). An increase in price of a commodity will lead to an increase in revenue. An example of products or services which has perfect inelastic demand is in a scenario when the consumer is supplied with electricity as the only source of energy from one company.

Since the introduction of corn and enacting the ethanol mandate sometime back, the consumption of ethanol in America has tripled. Majority of the corn is used by the machines that take about a third. The enacting of the ethanol mandate is has resulted to the increase in the prices of ethanol by about 1.5% as indicated by Babcock. As noted by various economists, the consumption has increased due to the introduction and erection of the ethanol plant and the high production, suppressing other alternative products and so the increase in prices. The other factor fueling the increase in prices and the high amount in America is the fact that the government has thwarted it from entering international markets (McConnell, 2005). Furthermore, as noted by numerous scholars, the fact that about 8% of the American fuel comes from ethanol has altered the flow and ebb of the product market.

Considering other factors, not everybody is threatened by the increase in the corn prices due to its demand. Some economists have noted that from about 40% of the global food index, ethanol only constitutes about 3% (Glauber, 2008). There is also a high probability that the price of corn might rebound prior to the growing term ends in the drop. They further state that the high corn prices has very little to do with the increase in the food prices in America. According to Mania 2008, the high prices of corn has a very minimal impact on given food items, and that the food items like eggs and milk, have high prices and the prices are unrelated to ethanol or corn. They instead say that the high prices are connected to the fundamental demand or supply relationship throughout the world.

As some of the rise in prices is as a result of the farm-level price rise, there are other factors that have contributed to the high food prices in America other than the increase in the price of corn. One important factor that should be considered and counted responsible for the high food process is the effects of high prices fuel. The effects of higher prices of energy might be felt in many forms in marketing, packaging, transportation, energy and other related factors.

References

Mania, G. (2008). Principles of Microeconomics. Fifth Edition. Cengage Learning publishers, New York

Tucker, B. (2008). Microeconomics for Today. Sixth Edition; Revised. London. Cengage

Learning publishers.

McConnell, C. (2005). Economics: principles, problems, and policies. New York. McGraw

Hill/Irwin, U. S. A.

Glauber, M. (2008). Corn Production and Ethanol. Retrieved from

http://economicsofcontempt.blogspot.com/2008/05/corn-production-and-ethanol.html on

6th, May, 2011.