Midwest Floods Ruin Crops

A corn field is submerged in flood water June 16, 2008 near Oakville, Iowa.

Lawmakers are lavishing attention on the food-fuel dilemma, but they, too, are getting and sending conflicting messages. In May, Sen. Kay Bailey Hutchison, a Texas Republican, called for a freeze on ethanol production at its 2008 level. She has been strongly rebuffed by Sen. Chuck Grassley and other Senate defenders of ethanol. The Senate Energy Committee has since held hearings on the matter; one guest, Prof. Joe Outlaw of Texas A&M University, noted that reducing ethanol mandates by one quarter to a half might bring corn prices down 5 to 10 percent. And today, a group of 58 members of the House of Representatives sent a letter to the Environmental Protection Agency, which is reviewing ethanol policy, in which it advocated that the United States "rapidly transition away from biofuels that draw down our food supply."

How will this affect consumers? Since the flood damage has not been fully assessed, it is hard to say, but two main points can be made. First, the price of food in the United States is primarily dependent upon fuel, marketing, and processing costs, not on the daily fluctuations of the commodity markets. Higher corn prices may nudge costs upward, but only so much. Second, some food prices will rise more than others. The cost of an ear of corn, since it is not processed, will jump more than Corn Flakes. Meat prices will also be volatile. Since corn-based feed is so expensive, many livestock farmers are in debt and trying to "liquidate" their stocks. That means that meat prices might drop temporarily and climb in the fall.