As has been pointed out here, at Environmental Economics, and elsewhere, the ethanol subsidies included in the Energy Policy Act of 2005 have wrought a host of unintended consequences: the shift in demand increased corn prices, inducing farmers to substitute out of growing soybeans and into growing corn. This production substitution was not sufficient to bring corn prices back down (plus you have to add in the effects of the protectionist tariff on imported cane-based ethanol), so livestock feed prices have gone up and food prices have gone up, in the U.S. and elsewhere (notably Mexico, where much food is corn-based). The combination of these effects has led to a general rise in commodity prices (and to pigs eating junk food, which is gross).
Then yesterday the Wall Street Journal reported that small ethanol-only firms are not faring well in the market (link is to WSJ energy blog); there’s a glut of ethanol (imagine that! subsidizing something leads to excess supply … who’d a thunk?), ethanol prices have fallen, and only the larger firms like ADM (rent seekers to the world) and Cargill have a sufficiently diversified production portfolio to be able to absorb this situation. Furthermore, ethanol production costs have risen because of the aforementioned increase in corn prices.
Have I mentioned that I derive gleeful enjoyment, if not schaudenfreude, from unintended consequences coming home to roost like this? I’m not necessarily proud of that, but there it is …
Then today the WSJ reports that Heinz has developed a genetically-modified tomato that is sweeter than a normal tomato (subs. required).
With prices for corn syrup and other ketchup ingredients going up faster than Heinz can raise its own prices, the Pittsburgh-based condiment king is overhauling its breeding operations to help compensate. Heinz is developing sweeter tomatoes that could cut down on its need for corn syrup, as well as varieties that resist disease, stay fresh longer and produce a thicker consistency. “The new seed work is all about creating the perfect tomato,” says Mr. Ozminkowski, the company’s manager of agriculture research.
The ethanol industry’s consumption of corn is just one factor driving up its price. Rising global demand for meat is also boosting prices, since corn is a key ingredient of animal feed. The cost of a bushel of corn has risen to around $3, about 40% higher than it was a year ago, putting pressure on many food companies. Meats producer Tyson Foods Inc. recently lowered its fiscal-year earnings forecast due, in part, to high corn prices.
The price Heinz pays for corn syrup has risen 25% in the past year, and the cost of growing tomatoes has risen by 33% in the past year. So getting more input bang out of your tomatoes looks like an important cost management strategy.
Even though many of us were able to anticipate lots of the unintended consequences of the ethanol subsidies, this move was one that didn’t occur to me. But it makes great sense.