Saturday, May 31, 2008

We need a better marketing plan...

The food-fuel debate may be over before corn farmers realize it. With the exception of a few in-house economists, the overwhelming consensus of Big League Economists [plenty more examples] is exactly what common sense is leading many consumers to conclude: ethanol takes corn acres away from food production, and the effect hits the world's poor the hardest, because they consume mostly grain.

Even one of agriculture's oldest stalwarts and Past Master Diplomatic Justifier of Farm Policy, Keith Collins is stating the obvious:
The Agriculture Department’s own longtime chief economist, Keith Collins, who retired in January, said that ethanol was the “foot on the accelerator” of corn demand — an essential feed for animals, as well as a part of many diets — and merited renewed debate. He said Congressional mandates for ethanol would require farmers to grow more corn for conversion to biofuel, at the expense of feed corn and other food crops.

“You’re building in tremendous increase in demand,” said Mr. Collins, who emphasized that he was not necessarily against ethanol. “It’s an increase that is going to feed into food prices.”

The United Nations report, the global agriculture outlook through 2017, said prices for farm crops will remain substantially higher over the next decade because of fundamental changes in demand, though they will gradually decline from current highs.

Because the recent spike in crop and food prices has been caused in part by temporary factors like drought, the report predicted that prices should decrease as weather conditions return to normal and crop yields improve.

“At least we hope they are temporary,” said Angel Gurria, secretary-general of the O.E.C.D., alluding to the potential impact of lasting climate change on agricultural production.

In addition to reviewing ethanol policies, the report said governments should reconsider trade policies like export bans that do not allow farmers to take advantage of higher global prices for agriculture commodities. [More]
I think we are just starting to see the effects of $6 corn on food prices here due to the longer response time from the meat industry - especially beef. In high-grain-consuming countries, the results are in your face right now. One clue will be to watch the tenor of the debate at the World Pork Expo this week. It is crucial to remember that the lion's share of the economic good ethanol does for farmers is restricted to grain farmers (and more especially, grain farmowners) - not all farmers.

The debate will also be roiled, oddly enough, by growing consumer experience with higher blends of ethanol. Consider this e-mail I received last week responding to our Roundtable on US Farm Report.
I am a central IL farm wife who talked her husband into buying a 2008
Chevy Impala which is a flex fuel car. Our first few tanks of gas we got

28 mpg. we then tried 2 tanks of ethanol which dropped our mileage to 17

mpg. That was about 15000 miles ago and the best we have done with
regular gas since the ethanol is 23 mpg. I have tried working with the
dealer who tells me that unless the computer on the car shows an error
message there is nothing they can do. I then contacted GM and was told
the same thing. I am a farm wife who would really like to support
ethanol but frankly for us it has not worked out well at all. Could you
tell me how I can contact Beth Lowry? I am at my wits end with this car
and at this point don't have much good to say about ethanol or GM. I am
constantly being told that no one has seen a mileage drop like we have
experienced. Our last two cars have been Impala's but the next one won't

be and if we can't find someway to improve the mileage on this gas hog
we won't consider ethanol again.
It has been a mistake, IMHO for the biofuel industry to downplay the reduced mileage of E-85, and highlight those few outlier examples of nearly equivalent, or physics-defying better mileage of higher ethanol blends. The stuff on has 70% of the energy of gasoline, fer cryin' out loud. When consumers like the lady above run into reality, telling them, "Who ya gonna believe - me or your own eyes?" seriously undermines any shred of credibility the ethanol industry has left. Pushing to install E-85 pumps will only replicate such experiences, I suspect. In the end, those pumps will serve mostly those who buy the stuff for non-economic reasons, like reducing Mideast oil imports (snicker).

But the real detonation could be caused by this springs wet weather which prompts the loss of a few million corn acres and a couple of bu/A in yield to produce a little too little corn for all our current customers.

That's when things will get moving. And if Hillary is playing the I-told-you-so game in preparation for 2012, and McCain steps into the White House, the current administration's precedent of unilateral executive action could allow the old subsidy foe the opportunity to change the rules of this rigged market.

All that could be avoided. Let go of the tariff and blender credit, and shift the blame to the market, which will sort out winners and losers more fairly than any legislator. The risk is low and the defense gains for the corn industry immense.

1 comment:

Biofuelsimon said...

HI, John,

This is a very thought provoking piece of work and reinforces some of the ideas that I've been working on for a while. One thing that puzzles me is: when will the price of grains be driven by the price of oil rather than the price of food stuffs? Will it be when 30%, 40%, 50% of grain goes in to fuel ethanol?
It is pretty hard to get the global figures on the amount of grain that the US alone has taken out of the world market and put into ethanol over the past couple of years, but I think that it might be about 2% of the total. On the following basis, in 2004 the US accounted for 18% of world production (the most recent year I could find figures for at the FAO)In 2007, 25% of the corn crop was used to make ethanol (I'll ignore the distillers grains, they'd have been available as grain if ethanol had not been made). Corn, according to USDA numbers accounts for half of the grains produced in the US. The simple thing then is to reduce the US share of the market by 12.5% from the 2004 number. Which shows a reduction in the volume of corn available world wide at 2%. Does that sound about right? If reducing the volume of oil available in a market by 2%, why would reducing the volume of gains available in a market not do the same?