With the world’s increased dependence on corn for food and fuel, economists warn a Midwestern drought could be an economic catastrophe. What's more, it could happen as soon as this summer.
With corn prices exceeding $5.25 per bushel already, experts fear a drought could make an already bad situation much worse. According to Bruce Babcock, Iowa State University agricultural economist, “The risk of drought right now is higher than normal because of the La Niña we are seeing.” In the event of a drought hitting the Corn Belt, Babcock estimates that corn could reach $8 per bushel.
As farmers rush to plant corn, it has squeezed wheat and soybean supplies, which has pushed grain prices up 20 percent to 25 percent or more. A drought would undoubtedly cause economic reverberations throughout the economy. Analysts warn that a drought-caused corn shortage could lead to $5 per gallon gas.
The pork industry is feeling the pain as much as any sector. “First quarter losses are now anticipated to be about $34 per head," according to Chris Hurt, Extension economist, Purdue University. To make matters worse, “U.S. sow slaughter so far this year does not yet indicate a movement toward liquidation.”
If there were a crop shortfall, higher corn prices would prevent the ethanol industry from earning a profit and lead them to cut production, Babcock says. Indeed, plans for as many as 50 new ethanol plants have already been shelved in recent months, including a $250-million Cargill plant canceled just last week.
However, don’t expect the ethanol industry to go away. As long as the federal government continues to mandate the use of biofuels, up to 36 billion gallons a year by 2022, the food-versus-fuel competition will continue. While there is an oversupply of ethanol right now, the energy mandate means that demand will eventually catch up with supply.