Commentary on News Article
COMMENTARY COVERSHEET
Economics commentary number: (circle) SL: Practice 1 2 3 4
Title of extract: Biofuel demand makes food expensive
Source of extract: BBC News, Chicago, http://news.bbc.co.uk/2/hi/business/6481029.stm
Date of extract: 23 March 2007
Word count: 830 words of commentary
Date the commentary was written: 20/01/2009
Commentary relates to these syllabus sections: Section(s) 1 2 3 4 5
Candidate name: Aleksandar Stupar
Candidate number: n/a
Commentary
The article above talks about the increasing demand of corn, because more and more companies that are producing ethanol are demanding corn; since it has been discovered that corn can be used to produce biofuels, such as ethanol. However, this raising corn demand has had also a negative effect, as people who regularly used corn can not afford it's price anymore.
There are many determinants which are now affecting the demand of corn, these include prices, rent, multiple uses, and preferences. The prices of corn have now gone higher then they were before, even for normal daily products where corn is involved. For example, now that corn is in high demand the prices on products such as "tortillas" mentioned in the article have gone up. This has a negative effect on the population, since some people can not afford anymore to buy the amount of tortillas they used to; and many are in fact in a situation of poverty, and the rising prices of such a preliminary food has altered this.
Since the producers of corn now want the companies that use corn to make other food to pay higher prices, then the companies have to put higher prices on their products. For example, if a farmer is now asking 50$ for 10 kg of corn, to a company, that same company to make a profit, will have to sell the cereals at a higher price. If the original price was, for example, 13 dollars, now the new price will be 17 dollars. Many people prefer to use in fact products that are made by corn, and now that prices have risen they will think twice before buying a corn product, since they might not be able to afford the same amount that they could afford before. The following graph shows the changes in the corn market:
Let's suppose that the corn market is in an equilibrium, the first equilibrium on the graph (which is labelled as "equilibrium"); this way the total quantity of corn that is sold (Q= 4) at a price (P=4) shows a balance in offer and demand . So, now that corn is being more demanded for the production of biofuels, the preferences over this good are altered, making the corn more attractive. Now, because of this, at the initial level of equilibrium the quantity demanded increases, making an excess in demand, thus an expansion of the demand curve occurs to ...
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Let's suppose that the corn market is in an equilibrium, the first equilibrium on the graph (which is labelled as "equilibrium"); this way the total quantity of corn that is sold (Q= 4) at a price (P=4) shows a balance in offer and demand . So, now that corn is being more demanded for the production of biofuels, the preferences over this good are altered, making the corn more attractive. Now, because of this, at the initial level of equilibrium the quantity demanded increases, making an excess in demand, thus an expansion of the demand curve occurs to balance this once again(pointed out by the label which says "new equilibrium")
This happens only when we consider that the determinants of the supply remain the same, these determinants are : price (cost) of production, technology and productivity, the season in which the corn is produced. All these factors may have an effect thus on the supply, and this would alter the graph to a different one, where the supply curve is the one that moves. If the price of the production increases, thus we will have a different supply - in the long term - , because the costs will be higher. If for the production of corn, we need newer technology that costs more, once again the price will go higher, and there will be a change in the supply curve. Final, depending on the season, the price of the corn will change, because it is more expensive to grow corn in winter under certain conditions that require a lot of time and resources. We can see the change in supply in the following graph:
The increase in the price of corn will now have important implications on the alimentation industry, and the goodwill of the final consumers. As mentioned before, corn has been used for example to make cereals, animal food, and other things; now, an increase in price will be translated as an increase in the production of such goods that use corn (cereals...etc). (Price of corn rises =costs rise=quantity falls) Thus we have the situation represented in the graph above, as the price rises, the quantity demanded is no longer the same, but it is smaller. For example, if somebody were selling orange juice, and on a really hot day 200 people were wanting orange juice that person can make the price higher, from 1 dollar to 1.5 dollars, now he will have perhaps 150 people, and thus he can decide to make it higher again to 2 dollars, now he will have perhaps 100 people, but he will make a profit even though he needs to squeeze oranges for 100 people.
However, it must be considered that as technology improves costs go down, thus we obtain the graph above, which shows us that when costs go down the quantity demanded increases. This means that the rise of corn prices stated above can become favourable once again, by the improvements in technology.
Thus we can conclude that from the increasing demand of corn for biofuel industry we have an increase in the demand and the price of the corn, thus changing our market for corn in two different ways. So we can see how corn now has reached higher prices, but to balance these prices the demand has fallen a little bit, because not many users of corn wish to pay the such high prices.
Biofuel demand makes food expensive
By Nils Blythe
Business correspondent, BBC News, Chicago
The corn trading pit of the Chicago Board of Trade is an extraordinary place.
People yell orders and give frantic hand signals to seal their bargains.
The traders wear garish jackets, so that someone across the floor will know who he or she is dealing with.
The latest prices of consignments of corn for future delivery are displayed on giant electronic boards along the walls.
And, although the price fluctuates minute by minute, over the last year wholesale corn prices have roughly doubled.
A fifth for ethanol
The reason for the surging price is increasing demand from refineries that are buying corn - or maize as it is sometimes called - to turn it into ethanol.
The ethanol is then blended with conventional fuels for use in ordinary cars.
"We are using 20% of our corn for ethanol," says Roy Huckabay, executive vice president of the Linn Group, which advises commodity investors.
"When the energy markets went bananas over the last year, the value of corn as an energy source sky-rocketed."
Lucrative work
The US Government is promoting the use of ethanol with subsidies.
And President George W Bush has set ambitious targets for increasing the use of bio-fuels in future.
Ethanol produces lower greenhouse gas emissions than conventional fossil fuels.
But many observers think that the big attraction of bio-fuels for the Bush administration is that they will reduce America's dependence on imported oil.
The policy is also making some American farmers very happy.
Sam Martin manages 19,000 acres of land, mainly in Illinois.
He has always used some of the land to grow corn, but is now adding to the area that will be seeded with corn this spring.
"2007 should be a wonderful year," he says with an optimism uncharacteristic of the often hard-pressed farming community.
"At the coffee-shop people were talking about doctors quitting and taking up farming."
Cheap food no more
But the impact of soaring corn prices on consumers is likely to be less beneficial.
Corn is used directly by the food industry in things like corn flakes.
It is also widely used for feeding animals like pigs and chickens.
And food companies are warning that high corn prices will feed through to everyone's grocery bills.
In Mexico, there have been street demonstrations about the rising cost of tortillas, which are made from corn.
And rising food costs are unlikely to be the only impact of biofuel refineries buying into the corn market.
In places like Illinois, the price of agricultural land has started to rise.
That will eventually feed into the cost of other agricultural commodities.
Sam Martin puts it succinctly.
"I think that cheap food is history," he says.
Perverse consequences
This trade-off between greener fuels and higher food prices is one of several difficult issues thrown up by the rapid development of the biofuels industry.
The world has already witnessed the absurdity of virgin rainforests in Asia being torn down to make way for palm oil plantations.
Palm oil, like corn, has become hugely profitable because of demand from biofuel producers.
But the environmental benefits of the biofuels are outweighed by the loss of the rainforests.
Biofuels can make a contribution to reducing greenhouse gas emissions.
But the processes by which they are produced need to be kept under constant review to make sure that they do not have perverse consequences.
And that includes forcing up the price of essential foods.
