As I have been arguing for years, this is not going to have a happy ending. Some day we will look back on this ethanol mandate fiasco as one of the greatest mistakes ever in American energy policy:
Riots, instability spread as food prices skyrocket
(CNN) — Riots from Haiti to Bangladesh to Egypt over the soaring costs of basic foods have brought the issue to a boiling point and catapulted it to the forefront of the world’s attention, the head of an agency focused on global development said Monday.
“This is the world’s big story,” said Jeffrey Sachs, director of Columbia University’s Earth Institute.
“The finance ministers were in shock, almost in panic this weekend,” he said on CNN’s “American Morning,” in a reference to top economic officials who gathered in Washington. “There are riots all over the world in the poor countries … and, of course, our own poor are feeling it in the United States.”
What could be behind this? Of course higher energy prices are partially responsible. But I think there’s more to it:
In the United States and other Western nations, more and more poor families are feeling the pinch. In recent days, presidential candidates have paid increasing attention to the cost of food, often citing it on the stump.
The issue is also fueling a rising debate over how much the rising prices can be blamed on ethanol production. The basic argument is that because ethanol comes from corn, the push to replace some traditional fuels with ethanol has created a new demand for corn that has thrown off world food prices.
Jean Ziegler, U.N. special rapporteur on the right to food, has called using food crops to create ethanol “a crime against humanity.”
“We’ve been putting our food into the gas tank — this corn-to-ethanol subsidy which our government is doing really makes little sense,” said Columbia University’s Sachs.
Former President Clinton, at a campaign stop for his wife in Pennsylvania over the weekend, said, “Corn is the single most inefficient way to produce ethanol because it uses a lot of energy and because it drives up the price of food.”
Not everyone is buying that, though:
Some environmental groups reject the focus on ethanol in examining food prices.
“The contrived food vs. fuel debate has reared its ugly head once again,” the Renewable Fuels Association says on its Web site, adding that “numerous statistical analyses have demonstrated that the price of oil — not corn prices or ethanol production — has the greatest impact on consumer food prices because it is integral to virtually every phase of food production, from processing to packaging to transportation.”
Couple of things. First, the RFA is not an environmental group. It is the ethanol lobby. Might as well say the National Mining Association is an environmental group. Second, how does the rate of food inflation compare to other items that depend on oil for every phase of manufacture and distribution? How about plastics, for instance? The RFA and other ethanol apologists should stop trying to deflect blame and own up to the issue.
Again, I don’t deny that fuel prices are fueling inflation. But that is due to tightening supplies. This food inflation problem is partially self-inflicted by our misguided energy policies.
I’ve been posting on this for a couple of weeks, mostly on what is going on with rice. Countries are starting to hoard their supplies, which is never a good sign. Egypt, India, and Indonesia are all prohibiting rice exports.
I heard a state senator from Iowa arguing for ethanol subsidies on the radio. He says it is high fuel prices driving up costs in food processing and transportation, not the cost of corn and wheat. That is the typical counter-argument.
I saw this story also: Food Costs Rising Fastest in 17 Years
This was interesting:
“I was talking to people who make $9 an hour, talking about how they might save $5 a week,” said Kathleen DiChiara, president and CEO of the Community FoodBank of New Jersey. “They really felt they couldn’t. That was before. Now, they have to.”
For some, that means adding an extra cup of water to their soup, watering down their milk, or giving their children soda because it’s cheaper than milk, DiChiara said.
U.S. households still spend a smaller chunk of their expenses for foods than in any other country — 7.2 percent in 2006, according to the USDA. By contrast, the figure was 22 percent in Poland and more than 40 percent in Egypt and Vietnam.
Soda instead of milk? Most kids wouldn’t mind.
I wouldn’t be too quick to dismiss the arguments of the Renewable Fuels Association. True they are a biased source but so are the politicians to now blame corn ethanol for higher food prices. Most foodstuffs worldwide operate on very thin margins. When rising oil prices kick up the costs of every phase in their production and distribution process other products can often absorb that with a modest price increase plus a hit to their margins. Food can’t do that. So I find RFAs arguments highly plausible. And the idea that rising corn prices are driving up the cost of things like milk and cheese (which is making news all over Europe) seems fairly implausible to me.
I’m not saying corn ethanol is a good idea. I think the poor energy balance of corn-ethanol is reason enough to pursue better alternatives. But I get highly suspicious when the powers that be try to blame the (possibly flawed) attempted solution for the original problem.
My wife reports that Thais are paying double for rice, compared to last year. It is a staple there, every meal.
Not sure what role fuel is playing in this. Thailand has some palm tree lplantations for oil, but not much else.
In the US, we sometimes pay farmers not to farm. I hope those days are over.
This are “fat city” days for most farmers. Maybe (probably not) we can wean farmers off of subsidies for good.
The high prices should lead to gluts in a few more years. These things tend to go in cycles.
What are the four most expensive words on Wall Street?
“This time is different.”
Commodities are on fire right now. There were in the late 1970s also. Maybe this time is different. Or maybe not.
This is clueless. Fertilizer and fuel prices have almost doubled in the past few years. A combine harvester is $300k, 250hp tractor $250k. It costs over $1000 to fill up a large farm tractor and that will barely last a long day of seeding.
Do the math before you start thinking farming is going through a windfall. You’ll come up with numbers like RR did that show that 85% of farm income is still coming from off-farm night jobs.
I agree that mandated corn ethanol is a bad idea, but if they mandated a ban on corn going into junk and fast food, they could more than compensate for ethanol.
On top of that, how much fuel is wasted hauling around a population that is overfed on McDonald’s? How much grain goes into beer and spirits?
Bob, the difference is that fast food and beer are private industries which respond to supply and demand. America can use corn for things past basic nutrition because of how much it produces (same for Western Europe). As fuel costs have gone up, the sale of beer has correspondingly gone down.
Ethanol, on the other hand, is a massive and utterly useless government subsidy which has INCREASED the amount of corn demanded in a time of higher prices. You’ll have a punt when beer and fast food survive solely on government subsidies.
By the way, I meant to say that beer prices have gone up and beer consumption has gone down.Not the same can be said for Ethanol.
My point was that ethanol is probably a waste of corn, but in the big picture of someone living the American Dream of loading up on burgers and beer and driving around in the 4×4, it’s probably not the biggest waste of food in America.
The US has had a corn surplus keeping the price down to below the 1973 $3/bu price for the last 30 years. That corn has been dumped on the market, keeping the price of cereals below the cost of production in Canada since the mid ’70’s.
The blender’s subsidy and the mandate for ethanol were a way for the Corn State politicians to get around NAFTA, but the problem is that the feasibility of a corn ethanol plant is tied to gasoline pricing, not food.
When a large portion of the ethanol plants were built, the business case was done on $2/bu corn. The numbers don’t work anymore with $5/bu corn. New capacity is flattening out and the existing plants are going to have difficulty staying afloat, regardless of the blender’s subsidy.
The 1973 inflation adjusted price for corn is about $18/bu.
6 billion hungry people on the planet will pay what they have to for food, but ethanol is tied to gasoline price. The sad thing is that right after the ethanol plants, the feedlots and poultry barns are going to get squeezed out until there is a shortage of meat and the price rises above the cost of production with the higher feed costs (which it isn’t right now).
In response to Brian’s comments:
The RFA argument that higher energy costs are to blame rather than ethanol useage is not plausible. Farmers are indeed facing higher input costs, but they are not the ones controlling the price of corn sold. The only way they can do that is by growing less corn, and they are growing more. The price is being driven from the demand side, and ethanol use is a substantial added fraction of that.
With regards to milk and cheese, what do you think most cows (and chickens and pigs) eat?
Bob-
Corn farmers used to net $25 an acre, and had to have 2000 acres to make it. Now, they can net $250 an acre.
A guy with a 2000-acre spread is netting $500,000 a year.
Hey, good for him. But do we need subsidies anymore? These farmers have brains, equipment, modern communications etc. Ag schools. The Dust Bowl it is not.
I ran a furniture-making business for 15 years, and basically got creamed by import. Fair enough. Chinese goods. My government built a huge port in Los Angeles to help bring in the goods.
I paid taxes, never got a dime from anybody. Hey, there’s no crying in baseball. But there sure is crying at the farm.
Farmers feel they are entitled to federal and state help. I guess after 70 years of subsidies, maybe they are. We have created a dependent class.
Still, I say if you can’t make money farming, then get out. I got out of making tables. Actually, I was shoved out.
That’s called free enterprise. I think it is a god system most of the time.
It’s very risky to create an artificial demand for a basic necessity of life because of the potential to cause a supply/demand imbalance. It doesn’t matter what that necessity is, be it energy, food, water, shelter.
As Bob points out, fertilizer prices are much higher. But that has two causes, higher energy prices but also higher demand caused by higher corn acreage responding to the ethanol mandates. So it is incorrect to point to fertilizer prices as if they are entirely dependent on energy prices. Food and energy are deeply intertwined, so it isn’t so cut and dried to point the finger at one or another for runaway prices. Both are to blame. The problem is that we have directly contributed to distorting the market for food in a very short period of time.
I think it’s important to support farmers and make sure that they stay in business. But I will say the same thing I said when I testified against an ethanol mandate at the Montana legislature in 2005: Doing so with direct subsidies is far less risky than creating artificial demand. I support farm subsidies. I don’t want to see farmers put out of business. But this is not the right way to do it.
RR
When rising oil prices kick up the costs of every phase in their production and distribution process other products can often absorb that with a modest price increase plus a hit to their margins.
Brian, there are lot of other things that are even more dependent upon oil for their production, yet haven’t seen nearly the price increases that we have seen for grains.
Again, no doubt energy is to blame. But energy isn’t the reason land prices have sky-rocketed. It isn’t the sole reason that fertilizer prices have sky-rocketed. I posted a story a while back from the UK, where fertilizer shipments were being diverted to America’s corn farms. This had the impact of causing fertilizer shortages in the UK, driving up prices. It is a complex affair, and the impacts ripple farther than most think.
RR
My point was that ethanol is probably a waste of corn, but in the big picture of someone living the American Dream of loading up on burgers and beer and driving around in the 4×4, it’s probably not the biggest waste of food in America.
Bob, this is true, but what you are missing is that we didn’t create a situation where we suddenly encouraged those behaviors. They have been there all along. The situation we created with corn happened suddenly, and there has been insufficient time to absorb those changes. We have distorted the market badly in a short period of time.
The 1973 inflation adjusted price for corn is about $18/bu.
But as I have pointed out before, yields aren’t what they were in 1973. So a comparison based purely on price per bushel is incomplete. Do it based on $/acre, and you will have something closer to reality. (I don’t know what that number might be, but I recognize that yields per acre are much higher).
I’m more convinced then ever that the CPI index is a sham. They claim milk prices are up 16.8% between feb. ’07 and ’08 for example. I don’t know what planet they’re shopping on,but a gallon of milk at Walgreens(still the cheapest in town) has gone from 3.29 to 4.69 in the last 6 months. That’s over 40%.
Even using their figures,it still looks like a sham result. They say milk and eggs rose 16% and 25% respectively,but food CPI only rose 4%. Something just ain’t right there. Other countries are reporting astronomical food inflation…and the greenback ain’t exactly soaring.
Ever notice that biofuels advocates always seem to quote the domestic food prices.
http://greyfalcon.net/grocerybill.png
It’s the EXPORT market that gets hit hardest.
_
Although, frankly Brazil is trying to meet this new food shortfall eventually….
Not sure if that’s going to be a terribly environmental process either.
I’m not missing anything. Over the last 30 years, corn yields have steadily increased. That has been the problem and what has kept corn price low. A farmer has to sell his corn at the market price, and grow as much as possible per acre to stay profitable.
This chart from UMN has it at about 90 bu/acre in 1973 and 160 bu/acre recently.
Do you think that corn yields are going to continue to increase or that an average on irrigated land of 175bu/acre is close to the maximum possible? If the cause of low commodity prices have been due to constantly increasing yields, what happens to the whole industry when the maximum yield per acre is reached?
What you people are doing is taking two relatively separate events of mandated corn ethanol and a flattening of US corn production and combining them into a thesis that corn ethanol is forcing up commodity prices.
Ethanol is contributing to high corn price, not causing it and if you shut down all ethanol production in the US, you would just delay the inevitable by a few years.
Adam Smith’s unseen hand at work: As other staples soar, potatoes break new ground
I remember reading that one could live on potatoes and a bit of milk/butter and get all the essential nutrients. This diet sustained Irish peasants for centuries because it could be grown on land that wouldn’t support anything else.
We just need to keep the government from mandating “potato ethanol”.
The NY Times picked up on this today also: Fuel Choices, Food Crises and Finger-Pointing
Work by the International Food Policy Research Institute in Washington suggests that biofuel production accounts for a quarter to a third of the recent increase in global commodity prices.
And we have the usual bloviating from a corn state politician: Senator Charles E. Grassley, Republican of Iowa, called the recent criticism of ethanol by foreign officials “a big joke.” He questioned why they were not also blaming a drought in Australia that reduced the wheat crop and the growing demand for meat in China and India.
“You make ethanol out of corn,” he said. “I bet if I set a bushel of corn in front of any of those delegates, not one of them would eat it.”
Since I was a kid, the rail siding, grain elevators, grocery stores, hardware store, hotel and the school have closed in the village next to our farm in Canada. There are very few young established farmers and the mean age of farmers is over 50.
Profitability in farming means that instead of young people choosing non-essential careers (like mine in Database Administration), more young people are going to choose farming. How is this a bad thing?
Its a bad thing if people starve as a result.
I gotta stop reading this blog first thing in the morning, it too often sets a gloomy tone for the rest of my day. This food-for-fuel thing has me boiling mad. I guess it is going to take pictures of starving people on the nightly news to convince us we need to change course.
Looks like the story got “Digged”
http://digg.com/world_news/World_food_prices_hit_record_levels
Kingofkaty:
Potatoes!
I have been buying 10-lb bags for $2, sometimes on sale for less. You can eat a long time on potaties. Also rice.
But it raises a point: Calorie yields are much higher in potato fields than corn, and less water is ued. Why not potato ethanol?
After you make the ethanol, you feed the slop to pigs, which yiled more meant than cows, per input.
High corn prices are bad for ethanol producers and consumers alike. I think refiners need a certain amount of ethanol now that MTBE has been banned though.
I still don’t see how U.S. food prices can be hurting anyone. Our food CPI was 4% last year,and the dollar sunk like a rock against most currencies. Wouldn’t that make American foodstuffs cheaper than ever for importers? Unless the CPI measure is a scam….
Benny – same reason you won’t see sugar beets turned into ethanol – no blender tax credit. According to API, 25% of the US corn crop goes to Ethanol. If there are biofuels credits they should go to the fuel, not be limited to the feedstocks used to produce it.
I don’t think this was EVER a good idea to subsidize corn ethanol. But it wasn’t so bad when there was excess crops and prices were low. Today the subsidy is just insane.
RR –
I have long thought that the unilateral decision of the oil industry to make a sudden switch from MTBE to ethanol would spike the price of ethanol. It isn’t just the sudden demand for the fuel – it is also the crunch on trucking costs getting to the refineries.
Maybe you can investigate how big that blip in demand was. It had to be really significant. And the demand would then plateau.
I am not of accusing the oil industry of collusion or anything (although it is interesting that they all switched during the same season). But you have to agree that it suggests that the oil industry was at least partially responsible for the corn price spike.
I also agree with Bob Dinneen that the price of corn couldn’t possibly have the pandemic impact on food prices that it is being accused of.
BTW, I only got into this business (cellulosic ethanol) because of non-food feedstock.
@JoulesBurn: OK, you got me. Pigs and cows probably do consume a substantial amount of corn. That’s what I get for tossing an opinion into a group of very sharp folks at 3am. But (if you’ll indulge me naive question) is it really necessary to feed them so much corn? It doesn’t strike me as being their natural diet. Are there no reasonable alternatives?
It seems like the case for a vegetarian diet (unless it’s 1000% corn) is growing stronger daily. In addition to health benefits and global warming effects, now there’s the real possibility of easing pressure on the price of food that would otherwise become animal feed (although I suspect much of that corn is of a grade that wouldn’t normally go into consumer products). And I can echo RR’s sentiments re: India’s vegetarian cuisine. What they do with vegetables is pure magic.
KingofKaty, where did you get the idea that there is no blenders tax credit for potato or beet ethanol? I don’t see anywhere in the Ethanol Blender’s Tax Credit a requirement that the ethanol come from corn, as opposed to from beets, potatoes or cellulose. I see an exclusion of ethanol only if it’s produced from petroleum, natural gas, coal or peat.
http://www.taxalmanac.org/index.php/Sec._6426._Credit_for_alcohol_fuel_and_biodiesel_mixtures
Bob Rohatensky,
Actually the run up in grain prices caused by the ethanol subsidies is going to make it more difficult for young people to go into farming.
It is causing land prices to skyrocket and land prices are the single biggest barrier to entry into farming.
TJIT
C. Scott Miller,
MTBE was dropped because even though the feds mandated oxygenate usage they would not give liability waiver for MTBE. The possibility fro large lawsuits was increasing because MTBE is quite detectable by humans at low levels and MTBE had a strong ability to move within aquifers once it contaminated them.
So the refiners shifted to ethanol to avoid lawsuits.
TJIT
It is causing land prices to skyrocket and land prices are the single biggest barrier to entry into farming.
You have to be kidding me. Don’t you remember $2/bu corn, and Willie Nelson and John Mellencamp doing Farm Aid. That wasn’t because land was too expensive, that was because there was such a surplus of corn that it was worthless.
THE BIGGEST BARRIER TO FARMING IS A LOWER COMMODITY PRICE THAN THE COST OF PRODUCTION
Corn land is only worth what it is worth as corn land.. duh. Anything that drives the price of corn land above what someone growing corn on it can pay is Land Speculation. That is a separate problem and in states like Iowa where 55% of the land is absentee ownership, that has nothing to do with ethanol and high commodity prices. It is land speculation and also the fact that there has been no profitability in farming for the past couple of decades, so all the children and grandchildren moved to the city and got jobs. They inherited the land, but don’t farm it.
Farm land and rents are free market, they will adjust to whatever market price the operator will pay or it will lie fallow.
Go out and buy a couple of $300k combine harvesters, a $200k seeding outfit and a $250k sprayer and come back and tell me about barriers to starting farming.
Again, not a clue here, keep moving along folks.
And another thing:
RR is upset because his dad is having a difficult time feeding cattle on expensive corn. I agree, it’s tough times for businesses based on $2/bu corn when it goes to $5/bu.
Most of the feedlots in my part of Canada are mixed farms and they grow all of their own feed. Do you know what is killing them? Diesel is $1.29/L at the pump and over $1 on the farm. Equipment and Fertilizer. And..
A cow that was in the US from Canada for 12 years tested positive for BSE and the USA used it as an excuse to ban Canadian beef until it was appealed through the NAFTA process. Canadian beef producers are still recovering from that financial disaster.
The US corn ethanol blender’s subsidy was another attempt at subsidizing US agriculture without a care about the rest of the world, and it has had a lot of unintended consequences, including causing hardship for feedlots and ranchers. Another side effect was that it has improved the agricultural situation in Canada.
Next thing you know we will have environmentalists saying that raising the cost of coal will improve the lot of the poor.
I other news:
Picture of WB-7 Fusion Reactor.
How much grain goes into beer and spirits?
Not enough.
The problem is not corn ethanol per se. It is the fact that government mandates shock the system rather that allowing it to adapt slowly.
There is a way consumers can fix it. Don’t by gasoline adulterated with ethanol.
bob,
Please learn a little about ag economics and what it takes to earn a living in agriculture. Your comment in italics shows you are pretty disconnected from the facts on the ground
Go out and buy a couple of $300k combine harvesters, a $200k seeding outfit and a $250k sprayer and come back and tell me about barriers to starting farming.
The following facts apply to both the just beginning and established farmer.
1. You don’t need to buy two $300K combines to get the crop cut, custom cutters that will do the job for you. The custom cutters will provide more machines, a faster harvest and require no capital expenses for you to finance.
2. There are perfectly functional used drills (seeding outfits) in deluxe shape that can be had for under $40K. No need to spend $200k
3. Ag applicators are perfectly happy to spray your crops for you, on a custom basis with no capital outlay required. Again no need to spend $250K for a sprayer.
In fact if you are just starting farming the farmers in the area will farm for you on a cash per operation or share crop basis.
The only thing you can’t farm without is land and that is the single biggest unavoidable expense starting farmers face.
No amount of hand waving on your will ever change that fundamental fact.
TJIT
Bob in italics,
RR is upset because his dad is having a difficult time feeding cattle on expensive corn. I agree, it’s tough times for businesses based on $2/bu corn when it goes to $5/bu.
Honest to goodness you don’t think that Robert and others like myself might be upset because the ethanol boondoggle is increasing food insecurity and starvation??
Didn’t you notice the title of the original post was food riots?
TJIT
Bob another point regarding your comment in italics below.
RR is upset because his dad is having a difficult time feeding cattle on expensive corn. I agree, it’s tough times for businesses based on $2/bu corn when it goes to $5/bu.
Robert and everyone who is concerned about sustainable agriculture is damn well entitled to be concerned about cattle production.
It is the most sustainable, low impact form of food production there is.
Furthermore cattle producers are not directly subsidized and are continually impacted by the many negative side effects of ag policies for other commodities.
Most people see the grain subsidies as a boon to the cattle industry. They have never thought through the impact of grain subsidies on cattle production and don’t understand the significant negative economic impact grain subsidies have on ranching and cattle feeding.
1. Cattle can graze and put on a lot of pounds that way. The short time in a feedlot balances out the fluctuating grass supply and stabilizes production levels.
Chicken and pigs can’t put on much gain while grazing. The modern production system of these animals is in fact entirely dependent on cheap grain. The highly confined modern pork and poultry industry that exists today would not be possible without cheap grain.
In other words grain subsidies and the cheap grain they cause ended up enabling beef producers major competitors.
2. You can’t raise cattle without land.
Ag subsidies have given a huge financial advantage to farming and run up land prices. They have put the beef producer in the position of having to compete with the US taxpayer for land. And the US taxpayer has mighty deep pockets.
Furthermore this has driven the conversion of fragile land from sustainable, environmentally friendly cattle grazing to farming.
My advise to you and others would be to put on your businessman’s hat, apply it to agriculture, and stop trying to help producers.
The unintended consequences of us farm policies has made it impossible for a generation of young farmers to start farming.
They have turned what should be a dynamic industry into a stagnant backwater that thrives by farming the government, not by being innovative and responding to consumer needs.
And it has caused immense environmental and social damage in the process.
TJIT