Table of Contents:
Summary of problem:
Corn- ethanol subsidies in the US....leads to farmers switching to corn production and convertion away from food and toward fuel production, which has resulted in more expensive grain prices around the world. This is having a huge impact on both poor and rich world farmers, and consumers around the world.
1. corn Ethanol for fuel
2. so, farmers switch crops, and corn prices rise, along with other grains as Americans start trying to power more of their cars with corn (ethanol)
3. food prices rise
4. feedstock grain for cattle rises
5. Farmers no longer able to economically feed cows, pigs, chickens
6. Cattle farmers begin to liquidate (reduce) cattle stock
7. Temporarily there is a drop in meat prices as inventory is liquidated
8. prediction (based on futures prices)....is that there will soon be a massive upward pricing in steak, and pork prices. (only at higher prices will it be economical for farmers to raise cattle and pigs because of the high price of grain (feedstock for the animals).
The math doesnt add up: corn-ethanol energy economics 101
1. Many critics state that it "takes more energy to produce a gallon of corn-based-ethanol than what you get out of a gallon of corn-based-ethanol". (if this is true, its very close, and debatable).
2. But, this is NOT true with sugar-based ethanol
3. There just is NOT enough corn. Even if we turned all of the available farmland in the US into corn production, we still wouldn't make enough ethanol to power our cars. So, we NEED to import ethanol if its going to be a viable solution.
Wrong incentives / wrong results:
1. By Washington giving subsidies for ethanol, they are creating incentives for farmers to shift labor away from producing food, and toward making fuel.
2. And, they are giving farmers of other crops the incentive to switch production to corn (for fuel)
3. this has the perverse effect of driving up food prices (less supply vs. demand). Note: corn is used to make high fructose corn syrup (in almost all foods), and is a key feedstock for animals, so it will cost more for steak, pork, etc. Ethanol production has driven up the prices of corn-fed livestock, such as beef, chicken and dairy products, and products made from corn, such as cereals. As a result of higher demand for corn, other grain prices, such as soybean and wheat, have risen dramatically. The fact that the U.S. is the world's largest grain producer and exporter means that the ethanol-induced higher grain prices will have a worldwide impact on food prices.
It takes 450 pounds of corn to produce the ethanol to fill one SUV tank. That's enough corn to feed one person for a year.
Macroeconomic problems:
1. Inflation (food prices rise)
2. Governments around the world attempt to control inflation in various ways. some do the right thing (inflation targeting with monetary policy), while others do the wrong thing (price controls as we are seeing in Argentina, Venezuela, China, Russia, etc)....
Political problems for the US
1. This issue is fueling anti-Americanism (much like the Iraq war, or the rejection of the Kyoto protocol)
2. Countries around the world are finding the US to be an easy scape goat for many of their own home grown problems. Venezuela, for example, can convince people that the US is to blame for the rise in food prices (rather than poor macroeconomic policies from Hugo Chavez). This pattern of blame is being copied around the world. Much of it may be true that the US is to blame for some of the rise in food prices, but so is drought, bad weather, and also an ever increasing demand in countries such as India and China. As people grow in income, they demand much more meat on the table. But, it takes much more grain feedstock to feed an animal (to feed a human). This accounts for much of the new demand in the world. The US may be to blame for a stupid energy policy, but politics and public opinion are using this mistake as a major rallying call for the anti-American camp, which is making it much more difficult for the US to resurrect its image around the world post Iraq war.
one example of US bashing occurred recently in Australia: http://www.foodandfuelamerica.com/2008/03/australians-riot-over-baked-beans.html
Environmental Problems (challenges):
1. Corn is one of the heaviest users of fertilizer. But additional fertilizer use around the Mississippi river is having incredible consequences in the Gulf of Mexico. See the discussion of "dead zone" where there is no fishing (from Time magazine): "says Mulholland. "The great expansion of corn could be a real problem." It would be a poor tradeoff if we killed the seas to fuel our cars."
Solution
What has to be done?
1. The US needs to stop this crazy idea of running cars on corn. The idea that we will just grow our own fuel is fine, but it is wrecking havok on the worlds food prices.
2. Switch focus, and look to sugar-based ethanol, which is better for fuel anyways. And, who really cares if the price of a candy bar gets to $10? (as opposed to increased Bread, corn, grain, and cattle prices).
Why it probably wont happen:
1. The US doesnt grow enough sugar cane (the US is a net importer of sugar already), and the sugar industry in the US is heavily protected with subsidies and import quotas.
2. The corn lobby in the US is powerful and is pushing for import tarriffs on imported sugar-based ethanol
3. Politicians have this idea that the US should be "energy-independent", and therefore argue that ethanol is the right way to go. Forget the fact that we dont get all that much energy from a gallon of corn-ethanol (as compared to sugar-ethanol).
Why sugar -based ethanol makes alot of sense:
1, Countries that are friendly to the US can produce alot of sugar (the entire Caribbean, Central and South America), as opposed to the unfriendly Middle east for oil. Brazil, for example is already the world's number one sugar cane- ethanol producer, and almost all cars in Brazil can run on that technology.
2. sugar-based ethanol is more powerful fuel (than corn-based ethanol)
3. if sugar prices were to rise as a result, nobody would starve (from not being able to afford food). Who cares if the price of a candy bar were to increase?
Politics
People might not care so much is the price of corn goes up, but once the price of steak goes up (dramatically) at the supermarket in the near future, I think people will start complaining. But, more than likely, they wont make the connections.....ie. ethanol subsidies...leads to expensive corn....which makes grain farmers switch to corn production....which leads to expensive feedstocks for cattle....which leads to cutbacks in production....which will lead to high steak prices....and expensive grocery bill.....BUT, ill bet that most people will just blame the next President (maybe a democrat), rather than tracing the problem back to the source (corn-ethanol, rather than sugar-ethanol).....
How US corn ethanol might be good for Latin America:
With the cost of US corn prices rising, the producers in Latin America might suddenly become more competitive. see article here: http://www.brazzil.com/articles/169-july-2006/9661.html
Read more from Kookyplan
News from the Web:
How ethanol-subsidies are harming the world's poor
"Foodstuffs have gone up 41 percent in price since October 2007, pushing many people over the line from poverty into privation or even hunger. The Food and Agriculture Organization, a branch of the United Nations, has identified 36 "crisis" countries, 21 of which are in Africa. The World Food Program, another U.N. agency, estimates that it will need $500 million on top of what donor nations have already pledged to fill what the WFP calls a global "food gap." .....source: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/13/AR2008031303347.html
"Global inventories of grains are nearing historic lows, while twenty percent of the U.S. corn crop this coming year will be used for ethanol production. Meanwhile wheat, rice and soybean prices have reached all-time highs and corn prices have jumped to a 12-year high. For the first time, we are seeing the emergence of a global agricultural market driven by the growing demand for grains and a scarcity of supply. Wheat inventories, for example, have reached a 30-year low. " http://www.financialsense.com/fsu/editorials/dancy/2008/0222.html
The U.S.D.A. released a report last month that highlighted; (1) how few additional acres have been planted globally in the last decade, even as world population and economic growth continues forward, and (2) how rapidly the global grain inventories have declined. A summary of the report is set out below. (Table from U.S.D.A. website)
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