LOVELOCK - One thing I have learned over the years, is that with every decision or action there occurs positive and negative consequences. A good example of this would be the decision of our political leaders to pass the Energy Independence and Security Act of 2007 requiring renewable fuel usage to increase to 36 billion gallons annually by 2022. This new policy had good intentions, mainly to reduce our dependency on foreign oil. However, let us look at some of the consequences.
I have to go back to one of the only things I remember from my Agriculture Economics 101 class, that was the "Supply and Demand Curves." This basic principle of economics states that when supply decreases, demand will increase and vice versa. In addition, when demand increases prices will usually increase for that product.
So, let's look at the ethanol situation; due to the government policy to increase bio-fuel production there was an increase in demand for corn and soybeans. This increase in demand caused an increase in the value of these grains. This was good if you were a grain producer, but bad if you were a purchaser of grain, for example a livestock producer.
As the demand for bio-fuels increased, so did the price of theses commodities increase. As the value of corn and soybeans increased, more acres of farmland were converted from forages and other crops to the more profitable bio-fuel commodities. This caused a reduction in the production of forages, and small grains. Therefore, a decrease in supply of these commodities along with the increase in cost for corn and soybeans caused an increase in the cost of production for the livestock industry.
As the cost of production in the livestock industry increased, many producers were forced to liquidate their livestock enterprises for more profitable grain production systems. As more producers switched from livestock production to grain production, the supply of meat to the consumer decreased, thus causing an increase in demand and an increase in the price of meat at the grocery.
The cost of food worldwide rose 37 percent from last year. The Consumer Price Index (CPI) for all food in the United States increased 0.8 percent between 2009 and 2010 and is forecast to increase 2.5 to 3.5 percent in 2012. Also, the cost of meat increased 8.0 percent from 2010 to 2011.
Although this is a very simplified example of present-day agricultural economics, it does illustrate the positive and negative consequences of decisions made by our political leaders. Sometimes policies are adopted to satisfy public opinion or special interest groups without a complete examination of the consequences.
Maybe a better energy policy would have been to not subsidize the ethanol industry, and not to set unobtainable levels of bio-fuel production. Therefore, allowing the free market to determine the supply and demand for our agricultural products. Remember, there is usually positive and negative results to any decision or action. The secret is to evaluate these consequences to see if the positives outweigh the negatives before making a decision.
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