Wednesday, April 16, 2008

Looks like a target to me...

As the food-fuel debate really hots up, ethanol is proving to be the focal point of global - not just domestic - complaints. To be sure it IS part of the problem, but only part, and it's hard to parse out how big a part.
C. Ford Runge, an economist at the University of Minnesota, said it is “extremely difficult to disentangle” the effect of biofuels on food costs. Nevertheless, he said there was little that could be done to mitigate the effect of droughts and the growing appetite for protein in developing countries. “Ethanol is the one thing we can do something about,” he said. “It’s about the only lever we have to pull, but none of the politicians have the courage to pull the lever.” But August Schumacher, a former under secretary of agriculture who is a consultant for the Kellogg Foundation, said the criticism of biofuels might be misdirected. Development agencies like the World Bank and many governments did little to support agricultural development in the last two decades, he said. He noted that many of the upheavals over food prices abroad have concerned rice and wheat, neither of which is used as a biofuel. For both those crops, global demand has soared at the same time that droughts suppressed the output from farms. [More]

I think Runge nails it. Because ethanol never made the effort to lose the training wheels (tariff and blender credit), it is one thing that politicians can do something to change. Even if it is the wrong thing. Ethanol has done practically everything except paint concentric red circles on the tanks. And it's a little late to be looking for support from those in agriculture they stomped on politically to get their industry breaks.

This is another reason I doubt the efficacy of subsidies. No recipient will ever deem themselves ready to do without, and the industry supported is forever at the whims of popular sentiment expressed by political will. In short, if you live by the subsidy, you tend to die by the subsidy.

But the much larger problem is the dots are becoming too big and easy to connect, as food shortages, riots and inflation are flooding the news:
  • North Korea: North Korea, which suffered from a famine in the 1990s that may have killed three million, faces a ``potential humanitarian crisis'' after harvests fell on poor weather and food prices surged, the World Food Program said.

    The country has a grain shortfall of 1.66 million metric tons this year, the United Nations agency said in a statement today, citing figures from the Food and Agriculture Organization. The shortfall was the highest since 2001, it said.

    The crisis may undermine stability in the Communist nation following years of economic decline, isolation and chronic food shortages. The United States is seeking to persuade North Korea to abandon its nuclear-weapons program in talks that also include China, Japan, Russia and South Korea. [More]
  • Philippines: “Producing biofuels today is a crime against humanity,” Jean Ziegler, UN Special Rapporteur for the Right to Food, was quoted as saying on German radio. A few days earlier here at home, Agriculture Secretary Arthur Yap said one of the reasons for the food crisis was the booming demand for biofuels worldwide. And last Monday, Rep. Roilo Golez was reported on radio calling for a moratorium on Biofuels Act of 2006, precisely because of the crisis. Making things a little more complicated, there are suggestions that the law is being used by some big landowners to evade coverage of the Philippine agrarian reform program, which is expected to boost the country’s food productivity, aside from making tenant-farmers owners of the land they till. [More]
  • Pakistan: Karachi - After five years of solid growth, Pakistan's economy is facing an import payment crisis and an acute food shortage to feed its ballooning population of 170 million. The country's newly-elected economic czar, Finance Minister Ishaq Dar, last week revised the country's expected growth rate to 6 per cent from 6.5 per cent.

    Pakistan has witnessed phenomenal annual growth rate of around 8 per cent since 2002, thanks in part to billions of dollars in US aid to fight Islamic extremism after 9/11.

    According to local reports, Pakistan has received close to 11 billion dollars of such aid since the twin tower attacks in New York in 2001. [More]
  • Nigeria: The World Bank has said it is ready to assist Nigeria in solving the problem of rising in food prices that threatening the world.

    This is coming on the heels of Federal Government's assurance that it is already taking proactive steps to avert the impending rice shortage in the country. [More]
It is fair to say the ethanol boom is a victim of extraordinary and virtually unpredictable bad timing. While producers in the US have been talking for years about the demand that would eventually arrive when billions of poor people finally make enough money to afford better diets, most of us gave up on that ever happening - at least in time to help our retirement plans. But global trade changed all that, and we now see the highest growth rates where the most people are.

The argument it's all another problem caused by Big Oil just isn't gaining traction - for reasons I have noted before. Plus the size of the ethanol industry, and its spectacular profits (well, until recently) doesn't make the industry sympathetic. Heaven forbid folks find out what kind of windfalls early ethanol farmer investors took home, although that story too is leaking.

Corn farmers are loath to admit that we can't grow everything for everyone, and offer some backtracking on mandates or subsidies. (Another problem with subsidies - they are addictive). So it looks to me we will push our production capacity to the breaking point.

And this is where we will see the collapse, I believe: the meat/dairy/egg industry.
Beginning this week, Canadian hog producers can receive cash for culling their breeding swine. A $50-million federal program is offering to pay $225 per breeding swine culled after April 14.

“The program is a reaction to what’s been taking place in the market,” says Gary Stordy of the Canadian Pork Council. “The decrease in sow breeding herd should have a good effect on the market.”

Through the program, Canada’s breeding swine inventory should shrink by at least 10%, or roughly 150,000 sows, boars and pregnant gilts. Producers must fill out an application and receive approval to qualify for the program. Reimbursements will be made to the producers for slaughter and carcass-disposal costs. [More]
The point is of all the causes to blame for the food crisis: weather, bad governments, demand for feed, rising diet expectations in poorer nations, and ETHANOL, which one is the easiest to take a stand against? And the easiest to shutdown almost overnight?

I'll give you a second to choose.

Hey - the marketplace is working after all!

5 comments:

Rick Anderson said...

Excellent points, John! Those in the ethanol industry want to protect it and don't want to talk about opening up to imports but it might be prudent to remove the tariff soon. Otherwise, it could get ugly in a hurry when the American consumer/taxpayer realizes their meat needs to come from another country just so they can protect domestic ethanol.

steve said...

Obviously there is a profit motive by those in the USA ethanol industry. However, weren't the tariffs put in place in order to build capacity in this country? Also, isn't the ultimate goal of the government to foster development of non-food based ethanol technology? This won't happen if all we do is import.

Anonymous said...

The LAST thing we need to do now is import more energy. When I fill up my tank, I would much rather the money go to US farmers and ethanol producers then to overseas interests, ANYDAY!

Ol James said...

The only question I have about importing is, Would it be cheaper than domestic?? After all it's the bottom line that would matter to most consumers. Especially with energy cost what they are today.

John Phipps said...

Steve:

I think you offer a false choice - that without subsidies ethanol production would be zero. I think the market would balance it out somewhere between today's level and zero.

If the subsidies are for building capacity, when will we settle for enough? We are perilously close to not being able to supply the ones we have and the biggest increase in capacity yet will be this year.

As for non-corn ethanol, this industry and the farmers who support it, won't quietly fade away should cellulosic come on the scene. This is not a bridge industry. However, as I have mentioned many times, I still consider cellulosic to be at best way in the future commercially, and at worst, the cold fusion of agriculture.

Subsidies are rarely diminished voluntarily, so you tend to have abrupt support disruptions. Ethanol could experience a similar fate. Especially if our corn planters don't get moving soon.

Anon:

We are stuck on the notion of our imported oil coming from the Mideast. The vast majority comes from Canada, Mexico, Venezuela, and Nigeria.

As for sending money to exporters, this idea is crucial to American farmers, especially wheat growers who export the majority of their crop. If it's OK for India to depend on our wheat, why is it wrong to depend on Mexican oil?

There is no way to export only and not import, although countries keep trying.