Ethanol Economy Raises Food Prices... and Hackles

Last Updated Apr 11, 2008 12:31 PM EDT

corn.jpgEthanol producers, which have been taking a lot of the blame for rising food prices â€" and rightly so â€" may have gone too far, boosting demand for corn so much that they have priced themselves out of their own market.

Agribusiness giants such as Cargill and Archer Daniels Midland, along with a slew of smaller operators, have taken America's cornfields by storm in recent years, armed with massive government subsidies.

But now, there's trouble in the moonshine business (ethanol is essentially the same stuff that came in jugs labeled 'XXX' in Ma and Pa Kettle movies). Corn prices have exploded, but prices for ethanol itself have crashed. Profits have evaporated. The agribusiness giants will suffer -- but only briefly, and only a little. Many smaller operators will have a hard time surviving.

Not even two years ago, corn was selling for less than $2 a bushel while oil prices were soaring. Ethanol seemed like a can't-lose proposition. Cargill, ADM, and the rest rushed to build plants and cash in. They built too many. Now, corn is going for about $5.50 a bushel, and ethanol prices are falling through the floor.

But, as the environmental site Grist says, "don't shed any tears over Archer Daniels Midland." Or over Cargill, for that matter â€" even though that company recently suspended plans to build a $200 million ethanol plant in Kansas, sending shock waves through the industry.

But in the long run, it isn't the big producers who will be hurt, it's the small ones, including farmer-owned cooperatives that had looked upon ethanol as a way to throw off the yoke of ADM and Cargill, major producers of pretty much everything that's made with corn. In large measure, they dictate how much farmers earn. They also affect how much you pay for your corn flakes, your soda pop, and your T-bone steak, since their demand for corn to make ethanol isn't going to soften in the long run. Not with all those government subsidies backing them up.

Independent farmers, like the agribusiness giants, are also beneficiaries of the ethanol boondoggle, of course. But that matters little given the giants' vast resources and market power. As the market shakes out, it won't be ADM or Cargill that will suffer most. And when the shakeout is over, they'll have even more market power than ever.

(Image via flickr user Chimpola, C.C., 2.0)

  • Dan Mitchell

    Dan Mitchell has spent the past 20 years writing and editing for newspapers, magazines, and Web publications. Currently, he writes the What's Online column for the Saturday business section of the New York Times. He has also written for the Chicago Tribune, the Minneapolis Star-Tribune, National Public Radio, Business 2.0, and Wired.