Friday, May 11, 2007

Boom and Bust in the Heartland?

Wyoming is familiar with the boom and bust cycles associated with the fossil fuel industry. It is blessed with large supplies of coal, natural gas, coalbed methane and oil. Whenever one of these industries heats up, communities boom. People get high paying mining jobs, the tax base goes up and the mining industry invests in the community. Communities are able to provide better services, in the form of security, healthcare, education, etc. But then, the reserves dry up and everything goes bust. The tax base can no longer support the new services and the towns become sleepy again.

For my last blog entry on political enthusiasm for ethanol, I was reading about John McCain's visit to Iowa this past February. The reporter described the Iowa town McCain was visiting as "revitalized by ethanol" - new business park, pharmacy, truck stop, etc. I started to wonder if corn ethanol be subject to the same boom and bust cycle that characterizes mining. Of course, farming is always subject to busts, but links to the fossil fuel market might instigate a new kind of cycle.

On the one hand, biofuels are fundamentally different from fossil fuels because they are "renewable." Towns won't disappear up because the well went dry. Farmers can keep producing corn, at least in the near term. However, I can think of at least a few reasons to be concerned about potential busts in the ethanol industry.

For one, ethanol prices and corn prices track oil prices. As long as the price of oil remains high, ethanol will remain competitive. Hence, all of the recent investment in ethanol. However, if oil prices dip, ethanol is not going to be such an attractive investment anymore. C. Ford Runge commented that oil prices probably will remain high in his recent article, How Biofuels Could Starve the Poor. Worldwide demand for oil is outstripping supply, a trend that experts expect to continue. However, while the trend in prices will be upward over the long haul, oil prices certainly could decrease for shorter periods. If OPEC floods the market with oil, ethanol will suffer, along with a few towns in Iowa. I'm not sure if this concern merits much worry, but I think it is worth pondering.

Political enthusiasm for ethanol will probably decrease the probability of an ethanol bust. Burgeoning state and federal renewable fuel standards will guarantee some market demand for ethanol and will at least partially shelter it from oil price shocks. If ethanol prices did bottom out for a long period, a policy probably would cushion the fall. Politicians are not apt to let the American farmer take a nosedive if they can help it. Americans have too much good will towards farmers.

I can think of one other reason to be concerned about busts. The pressure to increase yields increases pressure to use unsustainable farming methods, such as continuous monocropping and increased fertilizer and pesticide applications. I do not think farmers will hit a wall today or tomorrow, but continued use of unsustainable methods will decrease the viability of farming at some point.

While I have been talking about booms and busts on a community scale, individual farmers will also be affected by drops in corn prices. While $4/bushel prices are great, if farmers make investments in machinery and improvements, they will be particularly vulnerable to busts if corn prices drop. This week the St. Paul Pioneer Press ran an article posing the possibility that the current boom might be too good to be true.


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