It’s not love nor money that makes the world economy go round – it’s alcohol, or more specifically ethanol distilled from crushed corn husks.
The next financial disaster is less likely to come from the flagging euro or the excesses New York’s Wall Street investment banks, but from the hot and humid plains of America’s vast midwest, where corn crops are shrivelling under a drought.
Farmers are watching their profits turn to dust before their eyes as the worst drought for more than half a century withers their investments.
Corn prices have already doubled on the expectation of smaller, lower quality harvests this year.
Economy hooked on alcohol
Not only does that impact food producers – but livestock rearers who also depend on the corn crops to feed animals.
“Ethanol demand is the lynchpin of the current pricing model that we have,” said Michael Swanson, agricultural economist at Wells Fargo, the largest commercial bank lending to farmers.
Former president George W Bush triggered the production of ethanol as a bio-fuel from corn, making the energy, meat and banking industries dependent on alcohol.
Bankers claim corn-based ethanol has driven farmland prices to a record high and reduced debt for farmers at a stroke.
Oil refineries are diluting petrol with ethanol , as the alcohol oxygenates fuel and raises the octane value, making cleaner, more efficient energy – the blending boosts 84 octane fuel in to the 90s.
The truth is many farmers are losing money from growing corn, but making a profit on selling their crops to refineries who pay better for the ethanol than other industries pay for the foodstuff.
Food for thought
Bankers claim higher corn prices are good for growers – but not so good for livestock rearers, because the cost of meat is increased as the value of corn keeps rising.
“No one minds the cost rising, because the economics show that you’re making money turning that corn into ethanol, turning it to distillers dried grain. The folks blending it in to gasoline are making money,” said Bob Young, chief economist at the American Farm Bureau Federation.
The process is the corn goes to crushing plants which separate the ethanol from the crop. The alcohol is shipped to refineries that blend the liquid with fuel, while the distillers dried grain (DDG) is sold on to livestock farms as feed for cattle, pigs, poultry and sheep.
So here’s a word in the ear of investors – next time you think about seed capital as an investment, don’t forget about corn.