Tom Vilsack Doesn’t Believe in Supply and Demand

by Brian McGraw on July 16, 2012

in Blog

From the Sunday talk show circuit, summary courtesy of Politico:

High energy costs, not the drought gripping more than half the country, may take a bite out of Americans’ grocery bills, Agriculture Secretary Tom Vilsack said Sunday.

With 26 states in drought conditions, CNN’s Candy Crowley repeatedly pressed Vilsack on “State of the Union: over a connection to jumps in the prices of some food items, but Vilsack resisted the connection.

“If [people] are using this drought to inappropriately raise prices, shame on them,” Vilsack said.

Typically, when it is discovered that in the future there will be much less of a certain commodity than previously expected, the price rises. While some energy prices have risen, they haven’t changed enough to warrant such a dramatic rise in the price of corn. The primary cause is lowered yields resulting from drought:

U.S. feed grain supplies for 2012/13 are projected sharply lower this month with lower production for corn on lower yields. Extremely hot weather and drought result in a 20- bushel-per-acre decline in the projected corn yield to 146 bushels per acre reducing projected production to 13.0 billion bushels, compared with 14.8 billion bushels last month. The June Acreage report increased planted acreage relative to March intentions but harvested acreage was reduced 249,000 acres. Corn supplies for 2012/13 are projected1.8 billion bushels lower. Forecast 2012/13 prices are increased for corn, sorghum, and barley and oats. With tighter supplies and higher price prospects, domestic corn use is projected down 755 million bushels as feed and residual and ethanol use prospects are lowered.

And the inevitable price increase:

One argument in support of policies that encourage the use of biofuels is that the price of oil is subject to wild swings, decreasing “economic security” etc. as prices are not guaranteed to follow a predictable path. Unfortunately, corn ethanol is also subject to wild volatility resulting from variations in rainfall.

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