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.
stephenbainbridge.com |
