Sunday, July 22, 2007

Corn Volatility

Econbrowser makes a good point about corn-based ethanol that I hadn't previously thought of.
A recent analysis by University of Illinois Professors Darrel Good and Scott Irwin notes that over the last half-century, corn-production shortfalls as big as 30% are not that uncommon. Very inelastic demand means that having a stable, reliable source for fuel is a very high priority for consumers. Having the supply for such a commodity depend on something as volatile as U.S. corn production does not seem like such a brilliant idea.

Now this raises a potentially big problem for the U.S. Congress, and I'm not sure how they're going to solve it. Specifically, the question they might want to be mulling over now is, When the next 20% shortfall comes, at whom will they point the finger of blame?

The only thing I can think of to add is that I would imagine the ethanol industry would use futures to a much greater degree than food industries, and thus the assumption of perfect inelasticity is pretty valid.

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