Sunday, March 02, 2008

'Corn shock' could have new meaning if a drought in the Midwest drives up food and fuel prices

"Economists are cautioning that the nation's growing dependence on corn would make for a double jolt in the event of a drought across the Midwest: soaring prices not just for food but also for gasoline," reports the Los Angeles Times. "Analysts now warn that a 'corn shock' might not be far off -- and it could lead to $5 gas and $3.50 eggs as the effects reverberate across the economy."

The risk of a corn-withering drought next summer is greater than usual, because of the current La NiƱa, a cooling of the Pacific Ocean, Iowa State University agricultural economist Bruce Babcock told Times reporter Jerry Hirsch. Babcock and other said that if the corn crop falls short, its rising price "would prevent ethanol distillers from earning a profit, prompting them to slash production," Hirsch writes. "Oil companies would have to scramble to fill that sudden gap with conventional gasoline. Prices would soar for both fuels."

"Historically, we have had a food economy and an energy economy that were for the most part separate," Brown told the Times. "Now they are starting to fuse." (Read more)

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