This is a highly political post. It is probably moreso than any other post I have ever done. I am considering going out on a limb more on the weekends like this, but I'll see how it goes first. Since most of my readers are from states with a lot of agriculture, this particular post could be a risky move.
A few months ago I posted some predictions. I didn't mention it at the time, but there was one specific prediction in the list that was really the entire reason for the post. I couldn't think of a good way to post on the topic without sounding too political, but I wanted to be on record as predicting something that I saw as inevitable. Today, I'm going to go ahead and be political.
My prediction was that increased ethanol production would drive up the cost of food. That prediction may or may not have come true already, depending on who you want to listen to. The ethanol industry blames the cost of fuel, and it could be right, but I think gas prices are only part of the problem.
About a week ago, the head of the International Monetary Fund directly blamed biofuel (meaning ethanol) production as the cause of the food price increases occurring around the world and the civil unrest that has already occurred in countries such as Haiti, Egypt, and the Philippines. (There is deeper analysis here.) He also predicted that this would cause hundreds of thousands of people in poorer nations to starve if food sources continue to be redirected to ethanol production at the current rates. If he is right, this is a serious issue.
In the United States, most ethanol is created from corn. This is less efficient than other means, but corn is a crop that grows well here. The corn that is sold for ethanol use does not get used for food, so that drives the price of corn up. This causes farmers who might otherwise plant crops like wheat or soybeans to plant corn instead, thus driving up the price of wheat and soybeans as well. Since grains are used for livestock and poultry feed, the price of meats, dairy, and eggs are also heavily affected. This, combined with high fuel prices, makes all food expensive.
If there is something that genuinely threatens worldwide stability today, I actually think food prices do more than the problems in the credit markets do. The U.S. Federal Reserve has already established that it will go to whatever means necessary to make sure the banking system does not fail. Who is actually taking steps to keep food affordable, though?
Just so the situation is clear, current ethanol policies in the United States stipulate that more ethanol is used each year than the year before for the next few years. The government also heavily subsidizes ethanol and limits ethanol imports from other countries that can produce it more efficiently.
What I expect will happen is that current ethanol policies will be kept in place until the cost of food gets notably worse. Once things get substantively more bad than they are now there will be no choice but to cut subsidies and minimum requirements that encourage ethanol production. This will cause a lot of people who have made investments assuming a higher price of corn and wheat to go bankrupt. So, the farmers who are benefiting now from the high price of corn will be the ones who hurt the most when the price of corn inevitably crashes.
I hope that I am wrong. It just seems too obvious for me to be too far off the mark.
Update (4/21/2008): I found information about legislation from two years ago to remove the ethanol tariff that is currently in place here. The information at the link provides a good rationalization for why ethanol tariffs are stupid. I have serious doubts that the tariff will ever be rescinded, though.
Subscribe to:
Post Comments (Atom)
4 comments:
BB's parents mentioned this yesterday at Sunday lunch. Our brother-in-law's dad grows corn in Iowa and he is doing really, really well right now with his profits 4x higher than a few years ago. BB's dad mentioned that other countries use cheaper food, like sugar cane, to make ethanol, but that our government made it illegal to make with anything besides corn?
I am just repeating, I don't know if this is true. But if this is driving up the price of food, and I can see the logic now that you have pointed it out, why isn't someone higher up in government doing something about it?
The advantage of sugar cane, as I understand it, is that you get a lot more ethanol out for how much energy you have to put into it. With corn, you have to put almost as much energy into it as you get out of it.
It isn't illegal to import sugar cane or ethanol, but it is nearly illegal. There are tariffs in place that keep imports from occurring.
The main reason that no one does anything about it is that the agriculture lobby is relatively strong, and there are a lot of states with a lot of agriculture, so a lot of elected officials have motivation to protect corn. The one thing that I can see that can offset this is if other lobbies and PACs are able more pressure on lawmakers.
A while back, actually, the Senators Kyl (from Arizona), Feinstein (from California), and Sununu (from New Hampshire) tried unsuccessfully to repeal the ethanol tariffs. Something worth noticing is that none of these senators is from a state that grows much corn. Lawmakers from non-corn-growing states are the only ones who have the freedom to challenge the sanity of the current system.
That is quite unbelievable, that this is happening because of flaws in our government. I bet the founding fathers wouldn't approve.
I generally don't watch the news, but today I caught the end of the Nightly News with Bryan Jennings. They did a segment on the rising cost of food. The said that 800 million people suffer from on-going hunger every day, and that number keeps rising because of the increasing costs of rice and corn. That is really, really sad. It reminds me how wasteful I am every day and how many things that I take for granted.
Also, your post reminded me of a blurb I read in news of the wierd recently (www.newsoftheweird.com - 3/30/08 edition):
In the worst slums of Port-au-Prince, Haiti (where 80 percent of the people live on less than $2 a day), rice now sells for 30 cents a cup (double the price of a year ago), according to a January Associated Press dispatch, leaving the poorest of the poor to subsist mainly on "cookies" made with dirt. Choice clay from the central plateau is at least a source of calcium and can be baked with salt and vegetable shortening. However, recently in the La Saline slum, the reporter noted, the price of dirt, too, has risen about 40 percent. [MSNBC-AP, 1-29-08]
Post a Comment