Professor Bainbridge...on law, politics, religion, culture & food
Ethanol Policy: Economics and Ethics
The Washington Times reports:
Farmers and food executives appealed fruitlessly to federal officials yesterday for regulatory steps to limit speculative buying that is helping to drive food prices higher. Meanwhile, some Americans are stocking up on staples such as rice, flour and oil in anticipation of high prices and shortages spreading from overseas.
A Bay Area TV station reports:
The price of rice has increased dramatically in recent weeks due to crop failure overseas and resulting hoarding, NBC11 reported.
And at least one Bay Area store is asking customers to hold back on their rice purchases. Costco has posted signs asking customers to follow their regular rice-buying habits.
The rice price increase is a result of a domino effect, NBC11’s Noelle Walker reported. Drought in Australia led to a severe decline in rice production that in turn led the world’s largest rice exporters to restrict exports. That spurred higher rice prices and hoarding in Asian countries, NBC11 reported.
The rice problem is compounded by the shift in corn (maize) production from food to ethanol as part of the bio-fuel craze. In turn, as maize prices rise, farmers have shifted production from other staple grains such as wheat to corn.
I do not see this as some Malthusian crisis portending the end of the world. In short order, markets will adjust. The rising prices of food will incentivize farmers to put more land in the production and to make greater use of a higher yield crop strains. There will probably also be a shift towards greater use of genetically modified grains that have higher yields and longer shelf lives.
It’s always important to remember in these sort of situations that we have heard predictions of doom and gloom in the past—probably even before Malthus himself—and the combination of technology and basic economics has always provided a solution. There is no reason to think the present food price inflation will prove any different.
Having said that, however, it is important to note that government policies significantly distort the ability of markets to handle these sort of situations. In particular, Iowa’s place as first presidential caucus state and the resulting distortion in US ethanol policy bears much of the blame for present problems. A November 2007 paper from the American Economics Institute, The Benefits and Costs of Ethanol, reports that:
Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such as reducing greenhouse gas emissions, and energy security goals. This paper provides the first thorough benefit-cost analysis of increasing ethanol use beyond four billion gallons a year, and finds that the costs of increased production are likely to exceed the benefits by about three billion dollars annually. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test, and that Congress should consider repealing the ethanol tariff and tax credit.
The massive increase in the amount of corn being diverted into ethanol production is almost entirely a product government policy rather than market forces. In turn, government policy has been driven by interest group politics. Corn farmers, large agricultural businesses, and a subset of the environmental movement have combined into an unholy alliance that few politicians are willing to buck.
The importance of ethanol to the Iowa economy is well documented, as is the impact of Iowa’s first place in the presidential nomination process. In this election cycle alone, both John McCain and Hillary Clinton flip-flopped their positions on ethanol in order to cater to Iowa farmers.
It has long been clear that ethanol is at best a mixed bag for the environment. Production and use of ethanol is linked to emissions of nitrogen oxides, sulfur oxides, and other volatile organic chemicals. The use of fertilizers and herbicides results in contamination of groundwater and, via runoff, contamination of rivers and lakes. Ethanol production and transportation also consumes enormous amounts of gasoline, electricity, natural gas, and water.
Not only do we subsidize domestic priduction of ethanol, American tarriff policy keeps out cheaper Brazillian ethanol produced from sugar cane, which prompts a good question:
What sense does it make to have a surplus of environmentally-friendly Brazilian sugar-based ethanol with a yield eight times higher than U.S. corn ethanol and zero impact on food prices being kept from an American market by a tariff of 54 cents on a gallon while Iowan corn ethanol gets a subsidy?
It only makes sense if you’re a corn farmer or an ADM executive.
At least in the short term, we can now add starvation to the cost side of the ethanol equation:
According to the UN Food and Agricultural Organisation, the price of wheat is more than 80 per cent higher than a year ago and corn (maize) prices are up by a quarter. Prices for vegetable oils are increasing at similar rates. The organisation also reported that the food price index, based on export prices for 60 internationally-traded foodstuffs, climbed 37 per cent last year, on top of a 14 per cent increase in 2006, and the trend has accelerated this winter.
The effects of this are already visible. Earlier this year protests erupted in Pakistan over wheat shortages and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home and China has put price controls on cooking oil, grain, meat, milk and eggs. Food riots have occurred over the last few months in Guinea, Mauritania, Mexico, Uzbekistan, Senegal and Yemen. ...
Population growth and economic progress are part of the problem. Consumption of high-quality foods – mainly in China and India – has boosted demand for grain for animal feed. Add in poor harvests due to bad weather in places such as the US and high energy prices, and it is not surprising that prices are soaring. But the most important reason for the price shock is the rich world’s subsidised appetite for biofuels. Short-sighted policies are causing crops to be diverted to environmentally-dubious biofuels and, as usual, the burden is falling disproportionately on the poor.
The US government policy on subsidizing ethanol is bad economics, bad for the environment, and bad for hungry people everywhere. If biofuels are to be part of American energy policy, economics, environmental concerns, and ethics, all argue for the use of non-food sources (such as switch grass) farmed on land too marginal for use for food production.
You can’t have a shortage unless you price control. People will always be able to buy all they want. They just want less.
This food crisis is a joke. Follow the money. May 2008 rice futures are trading at 24.46 as of 4/23. May 2009 rice futures are trading at 22.78. Do the math, the traders have.
Why do we have a tariff on Brazilian imports?
We should REMOVE the tariff on Brazilian Ethanol, and REPLACE it with a tariff on imported oil.
I think 80% of the voting public would support that.
Um, no. People will not always be able to buy all they want. Consider the very poorest folks at the very margins of society. They have this distressing tendency of being too poor to buy food and starving to death in hard times, at least in poor countries.
Subsidizing ethanol is, of course, a spectacularly stupid policy. But not quite as stupid as directly tying food and fuel prices by mandating the direct conversion of food (corn) into fuel (ethanol). Amazingly, rational farmers turn their crops into fuel when demand and prices for their fuel is high, leading to an increase in food prices.
In this election cycle alone, both John McCain and Hillary Clinton flip-flopped their positions on ethanol in order to cater to Iowa farmers.
I really don’t understand exactly how this got started. He gave a speech where he said, “No ethanol mandates, no ethanol subsidies, but no mandates or subsidies for any other fuel, ‘alternative’ or not. I used to think that ethanol was a complete waste of time at $20-$40/barrel oil, but it seems like it may be worth it at $80-$100/barrel oil-- without subsidies or mandates.”
Somehow this got translated into a “flip-flop” on ethanol because, instead of continuing to say that he opposed subsidies and mandates and ethanol was pointless, he said that he opposed subsidies and mandates but ethanol (and he mentioned corn, sugar, switchgrass, as well as biodiesel and everything else) might be able to succeed without them since oil was so expensive.
The actual quotes in Iowa:
Yes, that means no ethanol subsidies. But it also means no rifle-shot tax breaks for big oil. It means no line items for hydrogen, no mandates for other renewable fuels, and no big-government debacles like the Dakotas Synfuels plant. It means ethanol entrepreneurs get a level playing field to make their case—and earn their profits.
The claim of a “flip-flop” is far overstated, in my opinion.
Higher front end month prices on commodity contracts is called backwardation, it’s usually bullish, as traders do not want to buy a futures contract that will decline over time.
I was just about to chime in on that, th… It’s a mistake to look at a price of a back-month futures contract as the market’s prediction for what the price will be at that time. Rather, the spreads between months are the way the market rations demand: a spread smaller than the “carrying charges” (i.e., the cost of storage and interest) signals to producers to move the commodity out of storage (since they aren’t getting paid for it). It’s what happens in bull markets.
Be careful about assuming the US could get all the ethanol it needs, if we ban or reduce corn-based ethanol production. The Brazilians have said repeatedly that only half of their car fleet is equipped to use ethanol-only fuel, and for the past year or so, consumers there have been filling up with all-ethanol when their cars permit - because it’s cheaper. Japan and the EU would like to import Brazilian ethanol - so much so that they are financing some of the first pipelines to bring the fuel from the hinterland to Santos and Paranagua - the main ports. If we eliminated the 54 cent import tax, it might improve our chances of importing a slightly higher share of the total, but it would not add to Brazil’s production capacity quickly. The other issue is world sugar supply. Right now India and Brazil are carrying a huge surplus for the world. If one or both has a bad crop, the surplus will be gone and processing sugar for food use could become more profitable than for fuel. It’s not an easy situation to remedy.
GK, right. And the Democratic candidates for President are tripping over themselves to reduce tarrifs and increase trade because they want to capture that 80% of the vote.
Oh, wait, this is planet Earth where the leader of Congress is holding a free-trade agreement, which benefits only the US because we already don’t have tarrifs on the other party’s goods, hostage and no one cares.
Corn ethanol is not a zero sum game. Ethanol plants in corn country are producing ethanol for less than predicted by the experts. Why? Because the ethanol is harvested from the corn. The remaining distillers grain is still excellent, and in some cases better, feed stock. (PDF) Do not buy into the spin that the current production of the US corn crop is causing a shortage of corn! Properly set up, an ethanol plant can get 1.3 to 1.35 energy units per energy input and NOT reduce the feed stock. The experts based their pricing of corn ethanol assuming no remaining value of the corn. Farmers and ranchers operate at very thin margins. They can take their corn to an ethanol plant and bring back distillers grain for feed. For them this is a win-win deal. They sell their corn at the market price and get feed for their livestock at a bargain price.
The only ethanol subsidy goes to the refiners. Most likely inserted into the legislation as a poison pill. MTBE was a product of the chemical / oil industry and I’m sure they did all they could to kill the 10% ethanol replacement solution.
1: We will never solve the fuel problem until we eliminate our archaic laws on fuel. We need to tax on profits not an magic guess on how much oil is in the ground.
2. Farmers that sell crops to ethenal plants pay more taxes on their total profits than the ethenal plants paid on their ethonal output, which was taxed at the same rate and the oil companies. However politicians are not too smart.
3. The future of fuel is electriciy and until Congress gets over the “hate Bush phobia”, we will never solve the problem.
4. The fuel problem will be solved by several different means. Windmills and solar panels can never make a dent in the up-coming train crash.
5. The problem will be solved with more drilling, oil sands, coal and the cleanest and least expensive will be Nuclear Plants, Not the mega-plants with mega-buck costa and mega-year to built, but by the extremely safe generators produced for the Navy.
6. Don’t hold your breath for anything rational to happen, with the lefty enviromentalist and and Harry Reid and Nancy Pelosa controlling congress, we have a long way to go!!!!!!
I’m a supporter of biofuels for environmental and geopolitical reasons, but I think you are on the mark about the policy issues. Tariffs are almost always a bad thing, except IMO for oil. And subsidies are usually the residue of obsolete policies that were bad to begin with. Ag entitlements are inefficient and misdirected. If you’re worried about the small farmer, why not just give them money, or an earned income tax credit that will benefit the poorest farmers more than the richest. If you are trying to maintain a strategic capability, like, for example, the Saudis who raise wheat in the desert to guard against food-based political coercion, then there are better ways to do it.
I think we need to keep ethanol requirements in place in order to reduce our dependence on foreign oil. A serious fuel tax would be better, and a carbon tax even better. We need to guarantee that there will continue to be a market for alternative energy. Right now, the possibility of falling oil prices is enough to scare people off.
Hmmmm.
“A serious fuel tax would be better, and a carbon tax even better. “
So. You hate poor people?
You must hate them otherwise you wouldn’t want them to freeze to death during a bad winter.
That is an issue when you increase the fuel taxes. Everyone has to pay them and that’s a big hit for poor people living in northern latitudes.
You must hate them otherwise you wouldn’t want them to freeze to death during a bad winter.
That is an issue when you increase the fuel taxes. Everyone has to pay them and that’s a big hit for poor people living in northern latitudes.
Why not increase the fuel taxes and then make up for it by cutting taxes to balance? You can do it at the low end, by pushing up the exemption or cutting the 10% rate, so that it’s effectively the same as the “rebate.”
I also dispute the argument that wheat farmers are substituting corn for wheat. I keep seeing this but no one ever gives any figures. This just makes no sense to anyone with real-world ag experience.
Acknowledging that the current mania for ethanol is awful public policy, there is at least one silver lining. As food supplies grow scarcer, the scientifically illiterate opposition to genetically modifed foods is lessening.
I think we hear a ringing good idea chiming through here. Why not only apply a tariff to fuel coming from unstable areas? So oil from Canada or ethanol from Brazil get 0 tariff. Oil from Nigeria gets a $10 per barrel tax or something. Nigeria straightens up a bit, and the tax goes off.
I realize that the supply would just shift, where countries forgo the tariff, but isn’t this something that the US, EC, Japan, China could work out among consumers?
JBP
Hmmmm.
@ John Thacker
“Why not increase the fuel taxes and then make up for it by cutting taxes to balance? You can do it at the low end, by pushing up the exemption or cutting the 10% rate, so that it’s effectively the same as the “rebate.””
And just how would that “balance”?
Imagine the fuel bill in the upper Midwest this past winter with a -50F wind chill on a $15,000 annual pay.
JGsez
“I also dispute the argument that wheat farmers are substituting corn for wheat. I keep seeing this but no one ever gives any figures. This just makes no sense to anyone with real-world ag experience.”
It’s a scam, you know it, we know it, bush knows it, and especially the IOWA corn club. The jefferson city mizzoora US house representative was on limbaugh a week or 2 ago and stated that ethanol would really become economical when oil drops to $70/bbl. How does that work? You see how hard its getting to keep this little web from getting tangled? Why the brazillian tariffs? I remember reading a few years ago Cargill was initiating a huge import program of brazillian ethanol, they’d be doing it except they ran into a little mizzoora interference.
But that stuff doesn’t change the fact this is all a serious effort to reduce our dependence on oil, does it?
30% of US corn production now goes to producing an ethanol supply that only comes to 3% of US annual gasoline consumption. That’s pretty pathetic isn’t it? Is the tax subsidy gonna go up so we can create more midwest corn clubs? How’s it feel to be on the side of big-govt liberals now, defending worthless, tax-subsidized central-planning stupidity?
th,
You are not very specific or arithmetic. Given the plunge in the $, the world price of corn is dampened quite a bit vs. the Euro etc. Add in the new consumers for in Asia for corn-fed beef, and you might note that ethanol is a small part of a major change in world markets.
Anyone out there own a calculator and capable of 8th grade arithmetic? There is some break even point of commodity corn price vs. commodity oil price in the production of fuel. It is not that hard to figure out.
JBP
Check US ag exports here:
Notice that the largest increases are for the “higher” value products - See All Wheat then different types of wheat, and muscle cuts of beef. Check out Barley also. US grain generally is a better quality product for the cost but usually most people of the world can’t afford the US products. The weak dollar makes these products a steal! And don’t forget to check corn. Corn export tonnage is a month ahead of last year and three months ahead of the five year average.
jbp, what we are dealing with here is govt-mandated policy, not anything based on market demand. There is no, zero, zip demand for ethanol as an automotive fuel, it’s all govt. BS. There are at least 5 different studies I’ve read that have 5 different conclusions on the net energy output of ethanol, the consensus is it isn’t even a breakeven endeavor. Go read one and see what 8th grader did it. Try to think of ethanol as a welfare case, then it might dawn on you whats going on.
You must hate them otherwise you wouldn’t want them to freeze to death during a bad winter.
That’s a harsh judgment. People generally don’t think that way. My feeling is that the suffering will be greater if we don’t do certain things. Right now we, in the US, are existing in an energy monoculture. There is a single point of failure. Petroleum is a noose around our necks. I’m not talking just Global Warming or just about the political stranglehold of OPEC. I’m suggesting that we are foolish to put all of our eggs in the same basket simply because something could happen that will make us wish we had an alternative. Any diversity in energy at this point is an improvement. Even France is doing better than us, with 80% of their electricity coming from nuclear. Brazil is the country I really envy at this point. They have been wise at diversifying to the point that they can go with either oil or ethanol any time they choose.
This is your “any diversity is an improvement” at work. 6 billion gallons of ethanol produced in the US per year at a final cost of $4.80/gallon, $2.90 avg US market price plus the $1.90/gal govt. subsidy totalling $288 billion. 288 billion buys 288 million bbls of crude oil @$100/bbl which makes 5.6 billion gals. of gasoline. Pure ethanol has 34% less energy content than gasoline, that gives you for the same money 5.6 b gals. of gasoline or 4 billion gallons of gasoline-equivalent ethanol making the entire ethanol program a huge net loss. And don’t forget, 30% of all US corn is going towards this fraud.
Since alcohol fuels have so much less energy than gasoline, they must be an inferior fuel. Got it! You might want to let the Indy Car Association in on that gem since they have been running methanol for forty years or more. In 2006 they switched to 10% ethanol and 90% methanol. In 2007, they switched to 100% ethanol.
You can’t just compare the BTU value of the fuel. You must also consider how efficient it can be burned.
Th,
If the final cost is actual $4.80 per gallon, why is the wholesale cost $2.70 in Illinois (pre-tax)?
I am not sold that ethanol is the answer to all energy problems, but the opposition to ethanol doesn’t hold up to basic arithmetic and fact checks.
JBP
Next entry: Jefferson on the Hereditary Presidency
Previous entry: Updated aStore
Introduction
- UCLA law professor Stephen Bainbridge's personal journal. Mostly commentary on politics, religion, and culture.
- Part of the ProfessorBainbridge.com family of blogs.
Recent Punditry Entries
- The NYT’s Floyd Norris Flubs Cuban Story
- Joe Lieberman: If I were a Dem
- Mark Cuban: Inside Trader?
- There is no joy in Redskinsville West
- Obama won the Cotton Belt
Hot Topics on Food & Wine
- Domaine de la Chevalerie (Bourgueil) 2005
- Louis M Martini Cabernet Sauvignon Monte Rosso Vineyard (Sonoma Valley) 2004*
- Antinori Ornellaia (Tuscany) 1990
- Degiorgis Sori del Re Moscato d’Asti NV
- Silver Oak as Phoenix
Hot Topics on Law & Business
- Federalist Society Program on the SEC and the Financial Crisis
- Stoneridge and the Supreme Court’s Dubious Track Record in Securities Cases
- Reflections on Two Decades in this Business
- The Insider Trading Charges Against Mark Cuban
- Corporate Law 2nd Edition
Flickr
Archives
My Books
Blogroll
- Althouse
- Amy Ridenour
- AtlanticBlog
- Beldar Blog
- Conglomerate Blog
- Crooked Timber
- Daniel Drezner
- Ernie The Attorney
- Evangelical Outpost
- Fool in the Forest
- Hugh Hewitt
- Ideoblog
- InstaPundit
- Jules Crittenden
- LA Observed
- Leiter Reports
- Less than the Least
- Maggie's Farm
- Marginal Revolution
- Mark Kleiman
- Mark Shea
- Megan McArdle
- Mirror of Justice
- Outside the Beltway
- Pejman Yousefzadeh
- PoliBlog
- Political Animal
- PrestoPundit
- Roger L. Simon: Mystery Novelist and Screenwriter
- Scrivener's Error
- Stuart Buck
- The American Mind
- The Anchoress
- The Right Coast
- TigerHawk
- VodkaPundit
- Volokh Conspiracy
- Wizbang
- Yin Blog
This so called food shortage is a chimera and will pass, but in the short term this is an excellent opportunity to act and get rid of these stupid ethanol subsidies. The Iowa caucuses are over folks.