Eclectic Analyses From Orthogonal Viewpoints

Turning corn into auto fuel is driving inflation up, and the effect is accelerating. While that may be obvious to some, follow along and let’s see if we can’t uncover the linkages.

Firs, the obvious: There’s less corn available for traditional uses.

Hang on, I’m not really suffering from a senior moment here. Let’s look at how many “traditional uses” there are for corn:

• Directly in food: Cereals, tortillas, side dishes, flour and meal
• Indirectly in food: Syrups, candies, condiments, baked goods, salad dressings
• As feed for meat animals: Beef, chicken pork
• Industrial uses: Polymers, adhesives, cardboard, paper, textiles, lubrication
• Fermentation: Acids, alcohols, amino acids

How bad is the effect, though; don’t we have plenty of corn? Ask commodities traders and they will tell you, it only takes a few percent change (I’m hearing 4-10%) in the amount of a commodity (like corn) to change its price by a factor of two or more. That is to say, the commodity suffers from a kind of “margin leverage,” much like trading options. When corn is scarce, ALL the users want to protect their supply, and there’s a mad scramble to get theirs locked up. Prices can go crazy.

From the list above, you can see a lot of linkages. While we’re not seeing runaway inflation today, it is at the highest level we’ve seen in almost two decades. More importantly, the major contributors to inflation today are food and fuel costs. A double-whammy when ethanol fuels get involved!

There are many interest groups suggesting that panic isn’t called for, there’s plenty of corn to go around. As near as I can tell, these are all groups that benefit from the recent run-up in corn prices.

To add a particular insult to our economic injury, ethanol fuels aren’t cheaper, so they don’t drive down fuel costs. I know, you look at the pump and it shows maybe 30 cents a gallon cheaper. In our area, E85 is about 10% cheaper than regular gasoline. However, E85 provides about 30% fewer miles per gallon.

Yep, you read that right. A whopping 30% reduction in fuel efficiency. Do the numbers: For 1,000 miles of travel, in a car that gets 20 mpg and burns $4 a gallon gas, the fuel cost will be $200. If you get E85 for $3.60 (10% savings) and you lose fuel efficiency down to 14 mpg (30% lower), your fuel cost will be $257.15. That’s 29% more money.

Since many families put about 1,000 miles on their car each month, I gotta ask: You got an extra $60 on you for fuel? (Oh, and a coffee, with the change.)

In short, ethanol for fuel is driving up fuel costs at a time when we don’t need that. And it’s driving up food prices. Pain in both of the highest-inflation elements of the family budget.

I can’t find a reliable estimate for the inflation percentage due to the changes in the corn economy, but I’ve seen numbers in the 2%-4% range (annual increase). To put that into perspective, that’s 2% of $13 trillion GDP, or $260 billion in lost buying power. And it’s showing signs of getting worse…

Seeya ‘Round the Ol’ Corn Grinder…

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Technorati : GDP, corn for fuel, damage to economy, inflation

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