Corn and Ethanol – Fidel speaks out
Speaking from what most considered his death bed, Fidel Castro made his first post-operative announcement to the world in his publication, Granma, and he talked about corn. That’s right, in his article, “More Than 3 Billion People in the World Condemned to Premature Death From Hunger and Thirst,” he talks about the rising prices of corn that result from the ethanol initiatives in the United States and how this will create a hunger crisis in the third world. (see Bloomberg)
Now, I browsed the table of contents of this publication and I admit it is not exactly USA Today (e.g., referring to the “Iraqi insurgents” as the “Iraqi resisters of the illegal occupation”). That being said, we should analyze his statement based on its content rather than its source.
From Castro’s perspective the trouble with the ethanol initiative is that it uses food to make fuel. According to his analysis (where do his figures come from?) the US intends to produce 35 billion gallons of alternative fuels by 2017 which would in turn require 320 million tonnes of maize, raising prices globally and subsequently lead to hunger and starvation for those masses which cannot afford the higher prices.
An example of this pricing domino effect occured in Mexico recently. With the increase in the price of corn, the corn-based staple food called the tortilla also started to creep become more expensive. This incident created a populist backlash which had to be addressed through national price caps. Federal response was sufficient to limit the initial price fluctuations in corn, but assuming price continues to increase over the next couple of years will the cap be sustainable?
One big assumption in Castro’s analysis is that corn prices will continue to increase or remain at historic highs over a long period of time. Granted the past year has seen significant changes in corn prices (up to $4 per bushel from $2.60 in 2006) but as with any cycle, investment should eventually reduce prices. That being said, the adjustment period could take years and the new equilibrium price could be higher than pre-ethanol initiative levels.
Are Castro’s figures correct? Is the third-world facing a catastrophe? Are corn prices really going up globally at the same level as they are in the US and will they continue to increase ? How large are the consequences of the US fuel migration?
