Monday, January 29, 2007

Supply Demand Irony - Part II

Tyson foods, the huge producer of Chicken and other food products, is quoted on the CNBC website today as follows:

"We remain on track to meet our earnings guidance for the year, but emphasize the dramatic rise in corn prices has become a major issue for us and others in the food industry. Companies will be forced to pass along rising costs to their customers, meaning consumers will pay significantly more for food," said Chief Executive Richard Bond in a statement.
The Tyson news release went on to say (though left off the article on CNBC):

If left unaddressed, the bigger long-term issue will be the availability of U.S. and global grain for protein and other foods. We fully support efforts toward renewable energy; however, as the food versus fuel debate unfolds, we must carefully consider the negative and unintended consequences of over-using grains."

Let me state the obvious. As ethanol becomes more popular, it drives up the cost of corn. Not only does this increase costs for all food products that use corn, it also drives up the cost of ethanol. As the cost of ethanol goes up, it becomes less competitive with oil based fuels. Meanwhile, the selling price of oil goes down as alternative energy sources increase total supply. At some point ethanol can't compete at all without massive government subsidies or consumers willing to pay a voluntary "green tax" on each gallon of ethanol-based fuels.

As Tyson said, this doesn't mean we should stop our efforts to diversify our energy resources. It only means that it isn't as easy as it seems. It is complex and each new direction has many potential unintended consequences.

Please note that the analysis just posted here is even more relevent to the global warming issue. Each action taken has far reaching consequences.

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