Ethanol and Food Price Volatility

Back from vacation. Now I need a post-vacation vacation to recover from hauling the kids all over Chicago to see the sights.

Just a quick one to get the ball rolling again. From Econbrowser a pointer to some recent research on corn production, food price volatility and how that will affect ethanol. Nut graph:

Food prices naturally are quite volatile because unpredictable and uncontrollable variation in weather can produce a bumper crop one year and a big shortfall the next. Usually consumers are able to mitigate somewhat the consequences of the volatility of supply by switching between foods depending on what is most cheap or expensive at the moment. However, whereas the demand for food is relatively price elastic, the demand for gasoline is quite inelastic. If the quantity of ethanol demanded does not fall much when there is a bad crop, the quantity of corn used for all other purposes must make an even bigger proportional adjustment. For example, if 1/2 of our corn crop were devoted to ethanol production and ethanol demand were completely price inelastic, a 10% reduction in corn production would require a 20% reduction in use of corn for other purposes.

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.