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04/13/2008

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Larry

You could also mention the way the increased cost of gasoline raises the cost of transporting foods to market... John McCain was the only presidential candidate who had the moxy to go into Iowa and tell the truth about ethanol.

neilehat

Agriculture is an industry and business. Based on the current models under which it operates it cannot be otherwise. Take for example, the U.S. Mid western farmer, he can plant soybeans and expect a return of say, 10 dollars an acre, after covering his high energy and chemical costs (hebicides, pesticides, fertilizers, fuel for mechanised equipment). Or he can plant corn and garner say, 20 dollars an acre. You're businessmen, do the math. So what do you plant and take to market? The same model applies in Columbia, (coffee or coca), Afganistan, (food, opium), Mexico, (corn or pot) and the list goes on. That's why the discipline is called Agronomy.

But all this rise in cost has nothing to do with the Malthusian/Erlich "population bomb" scenario. It all has to do with deregulation of energy markets and the wide open speculation now allowed in raw material feed stocks of the Oil, Gas, Petrochemical Industries, Which supplies the majority of the feedstocks into the Agricultural Industry.

Perhaps, we're seeing the final debunking of the myth of self regulatory Laissez faire markets as the best model for producing public needs and goods.

Tom K

Neilehat, I think you're ignoring that this sharp increase would not be happening were it not for the massive diversion of one of the staples of our food supplies into fuel. That diversion isn't a result of laissez faire markets, it's a result of government subsidies, political pressure, and cronyism (you wouldn't believe how many owners of ethanol plants just happen to be siblings and other close relatives of state and local politicians).

This just proves to me that this lunacy of corn-based ethanol needs to stop--immediately.

David Heigham

Grains are commodities. In commodity markets prices rise steeply when there is an unanticipated fall in supply or increase in demand. Looking back a year or two, I think that the markets were beginning to anticipate the very large, but gradual, likley increase in demand from China and India. It was well advertised. The efect of susidising bio-ethanols from grain were not adequately quantified - very few players accurately foresaw the levels of oil prices, or the possibility of building quite so much bio-refining capacity.
More basically, the climate change scenarios had not and have not factored in adequately the effects of greater climate variability in reducing expected crop yields. It is not just that cropland gets drier or wetter or warmer, it is that more weather happens at the times of year when farmers don't expect it. Even those (like your humble servant) who had an idea that this would prove important in the medium term have been taken aback by it seeming to become significant so quickly.
Even if governments correct their dafter policies (like Posner, I have little optimism about that), the grain markets face troubled times for the foreseeable future.

j

The broad-based increase in soft commodities comes from 1) biofuels, 2) supply bottlenecks, 3) consumption patterns and 4) speculation. For Becker to claim that the underlying pricing trends are mostly to do with rich-world biofuel policies is a gross simplification of facts in an attempt to support classical economic maxims (mainly, that supply and demand react to each other in a rational discourse).

The short-term price increase is virtually all attributed to the agricultural hedge as the equities markets continue to display massive uncertainty.

But make no mistake--data point after data point refer to the fact that, in the next decade, food prices will continue to creep up given demand-substitution: principally, the increasing demand for meat products.

In the meantime, supply is heavily constrained, mainly the form of two necessary inputs: land and water. It will take time for governments and farmers to adjust to this new reality as the push for GMO crops, more efficient use of fertilizer, and the continued substitution of agricultural production to centers of comparative advantage (i.e. Brazil) will gradually ease the pressures.

The tenets of classical economics still remain and in the long run supply and demand will reach parity--but economics is as much a function of time as it is of human rationality.

Daniel

Regardless of the causes, Western developed countries need to take immediate action to curb the third world food crisis - more immediate than removing the inefficient corn subsidies. If this is not done, the result could be widespread political instability. If the Egyptian government is overthrown by a terrorist group the results could be devastating. The US has already created a terrorist base in Iraq and Afghanistan is once again under the control of the Taliban. If another country in the region flips, $111 a barrel crude could look cheap - further driving up the costs of food.

Jack

Ha! most of the comments come down to defining our era as the time when we learned how to burn food to maintain our fleet of gas hogs! Had 80% of the SUV fleet been something more like the Volvo wagon (18-26 mpg) we'd have saved far more energy than ethanol provides. (This assuming it provides ANY more energy than is used in its heavily subsidized production.)

And Ha-Ha! my elation that Alaska's new governor has forced the ollies to get off the dime and finally begin the Alaska gas line project which could supply 8-10% of US NG consumption was somewhat dampened when I learned that the Canadians want to tap a large chunk of the NG for the massive power consumption required in the environmental disaster of producing oil from tar sands. So! now we've a costly and environmentally unsound means of turning a beautiful domestic fuel like NG into oil to then be turned into gasoline for our gas hogs. Great! Grand wealth should follow soon after!

neilehat

Tom, and how many "owners" of ethanol plants do you know? As for the supposed "cronyism" that exists, does that come from the nutcase on the soap box down on the corner? The ones I know are simply businessmen investing their life savings in an emerging technology and doing something patriotic by trying to help the Nation out of it's energy bind.

As for the price increases in food, they're going to happen anyway. If the farmer can't recoup his production costs in the market, production will decline and the law of supply and demand will take over, driving the costs higher. Maybe govern ment subsidies for ethanol production is an indirect good because it is driving corn prices up and keeping acreage in production that would otherwise be allowed to lie fallow.

Welcome to Laissez Faire. You do realize it helped create the great Irish Potato Famine - with a little help from the Potato Blight via the great "Corn" debates in Parliament.

Jack

Sorry Neil but you're on very thin spring ice on that one! The "emerging tech" would be nothing but for the lobbying by Archer-Daniels and a host of corn farmers. The "doing something "patriotic"" is enough to trigger a gag-reflex in those observing the scam even from a fair distance.

Lots of contradictions in your second paragraph:

........"As for the price increases in food, they're going to happen anyway." .........Oh? And IF the ethanol WERE produced by land that would "otherwise lie fallow" corn prices would be on the normal, pre-burning food to fuel SUV's, supply and demand curve.

....... I don't recognize much of any lassez faire in a scheme involving hefty subsidies, mandates to use the stuff, and little evidence that its use expands the supply of fuel significantly or at all, despite pricing tortillas out of the reach of Mexican peasants.

I'd like to hear more about the Potato Famine which I understand to be a warning about mono-cropping, ie, that there were but two strains of spuds that made it to Ireland from the New World and one was susceptible to the blight. Apparently the famine was worsened by British colonials taking the nice ones for themselves and leaving the poisonous black ones to feed the Irish kids. Come to think of it "lassez faire" is often held out as the name for actions such as those of the Brits; in English I think it translates to "devil take the hindmost?"

Haris

Oh, how I wish I could express the sort of patriotism that involves receiving massive subsidies from other taxpayers.

neilehat

Jack and Haris, Very strange, you all condemn the use of subsidies given out to a group, but say or condemn not, those that you yourselves have benefitted from. Like North slope oil, the trans-canadian pipeline, the U.S. routes and Interstate highways, etc., etc., etc.. Very strange indeed!

As for the potato famine and Laissez Faire, you got it right. It was massive policy failure. I wonder if subsidies would have worked? No, can't have that, we need to allow the market to self correct.

As for the current ethanol subsidies, we live in a massively chemical and energy dependent world and like Faust we've made our bargain with the devil (and there is no going back). And so we need to bring all of the resources we have to bear on the problem. Including biofuels. BTW, ADM is just one of the players, including many more Farmer Co-Op's.

Tucker

There are a lot of short term supply bottlenecks that make the use of export tariffs less of a problem for increasing supply than Becker realizes. First of all major crops take at least 100 days to grow, so any change in policy that takes place after planting has no effect on yield. Second the US, Australia, Canada, England, the Benelux countries, and parts of East Asia have virtually no fallow agricultural land. There has been some reduction in land available due to development, but the government hasn't paid farmers to leave land fallow since the Nixon administration. Yields have basically peaked in many of those places unless new technology comes along, and there hasn't been any research resulting in increased yields for the last 20 years in corn. Genetic engineering has reduced risk and changed the product rather than increased upside. I'm not saying that greater yields are impossible, just that it will need to happen in other places. Third increasing supply in Vietnam, Egypt, or any other place that has not reached peak yield requires capital rather than work. This means that a long term trend in rising prices is more important because increasing yields is a long term investment. Clearly prices are rising long term and losing 20 cents per cwt. because of the export tariff this year isn't going to stop them from investing in the necessary physical capital. For this reason it is necessary for governments to interfere in agricultural markets because if prices drop suddenly they don't want a long term reduction in supply. Consequently imposing a tax on a windfall profit is justified.

Any change to the international market for agricultural goods needs to start with the United States. So far agricultural market liberalization has always caused higher prices for the country that does it. This is because the US and EU have increased their intervention in domestic agricultural markets. Further strategic grain reserves have been gradually declining for years now, because countries have instead been investing in dollar reserves that have recently become much less valuable. Worldwide the interventions in domestic markets make the international market smaller and much more volatile.

Helping rural farmers while forcing urban consumers to starve is impossible for a developing country. Food riots are one of the quickest way for a government to fall.

Jack

Neil: for the sake of clarification I don't see a "subsidy" in North Slope oil or our national highway system.

In the case of the Slope private companies discovered oil there and developed it using private capital. The oil was discovered on land which became the small percentage of Alaska selected under statehood and belongs to the citizens of Alaska.

Our system of highways seems to be financed by a system of largely voluntary user fees, though under current policy, unwise in my opinion, the are insufficient to maintain, much less improve the network, so it could be said the system is being "subsidized" by past capital investments while passing on the trillions needed for delayed maintenance on those poor souls who'll also inherit $12 trillion plus of federal debt.

I'm not entirely pessimistic about ethanol and perhaps corn based eth is but a heavily subsidized pilot program that is preparing our fleet and infrastructure for more rational means of producing it in the future. But currently it is there due to a Congressional decision to create a sizable subsidy that would appear to reflect the political power of ADM, the farms states and the coops you mention rather than science or common sense.

Given Congressional intervention and the cost of both the taxpayer's subsidy and the predictable rise in the cost of all foods based on corn or the crops that compete with corn what other avenues might have been open to us and wiser?

A. Ethanol actually works in Brazil but that is due to sugar cane being a seven times better means of producing ethanol, yet we've a hefty tariff on Brazilian eth. Worse? We (NAFTA and similar) have helped to kill Mexico's sugar industry. It would seem we could lower Mexico's unemployment problem and benefit ourselves by cooperating to have them create much of our ethanol from their cane fields that are suffering due to our own sugar subsidies. (beets? corn syrup?) and a special "screw Mexico" provision in NAFTA which is now even more ridiculous than when it was arm-twisted into being:

http://www.opensecrets.org/pubs/cashingin_sugar/sugar06.html

B. If Congress were going to intervene it strikes me that the cheapest, cleanest, most readily available "alternative" is that of conserving traditional sources of energy in transportation, buildings and mfg processes. What could we have conserved over the last decades just by applying CAFE standards (worthy of the name) to SUV's and "light" trucks?)

Would the funds used for the ethanol subsidy have gone further were we to have subsidized Energy Star standards on the ten million new homes built over the last decade? Or made the improvements to smooth traffic flow on our aging highways and streets? (A recent Atlantic estimates the cost of "gridlock" at $75 billion a year.)

Or catching the rest of the sunbelt up to CA's level of conserving electricity and implementing solar installations?

I think subsidies often have their place and have rarely been a defender of "the market" will cure all, as it is not a very forward looking process and appears to ignore history completely. But given the virtually bankrupt mess we've been left with it would seem we need to get the biggest bang out of every buck both in and out of government. The subsidy of ethanol on a full scale roll out seems premature and doesn't meet the criteria. But who knows, if they can fill the special pipelines et al with enzymatic switch grass, pulp etc maybe it will work out better than I expect.

neilehat

Jack, As for the development of the Arctic Oil Reserves, one needs to take a deep and close look at the capitalisation structures used. The subsidies are there either in tax incentives, permitting incentives, or other types of capital incentives. This applies to any large scale project.

As for the ethanol issue, it's development has not been for a 1:1 swapout with petroleum based fuels, but as a fundamental swap with MTBE as the prime oxygenate additive in the fuels recipe due to MTBE's toxcity and environemntal impacts. As for building Mexico's cane industry, the issue is "energy independence". Where does the independence come from if once again we're dependant on foreign sources? Furthermore, the subsidy functions as a price support to the corn growers whose operating costs are beginning to outstrip the cost they can recoup in the foods market. How long can you operate if the profit you receive for your product doesn't even cover your production costs? Not long. This also ties into the issue of "independence".

All this talk about globalization and one great big happy economic family is a touchy feely sentiment that has no reality. And the government is beginning to recognize that fundamental fact.

Nelson

All this talk about globalization and one great big happy economic family is a touchy feely sentiment that has no reality.

You might want to read this...
http://www.econlib.org/library/Bastiat/basSoph.html

MiltonF

Thank you, Mr. Becker. Well-reasoned as usual. Consider this.

We have studied the effects of oil price increases on both the domestic and world economies for years and characterized them as "oil shocks".

Perhaps when governments implement policies that impose economic hardships on citizens and serve to exacerbate shortages, constrict markets, and reduce profits, the resultant effects on economies should be characterized as "policy shocks"?

Anyone?

Jack

Jack, As for the development of the Arctic Oil Reserves, one needs to take a deep and close look at the capitalisation structures used. The subsidies are there either in tax incentives, permitting incentives, or other types of capital incentives. This applies to any large scale project.

.......... I'll admit to not knowing every detail on Prudhoe Bay and the AK Pipeline though I've lived there during the construction era. Other than cutting a deal to clear up native land claims that would have had to be done sometime I don't recall any incentives. It has been and IS pretty fat w/o incentives. Today? 700,000 bbls @ $114?

nt has not been for a 1:1 swapout with petroleum based fuels, but as a fundamental swap with MTBE as the prime oxygenate additive in the fuels recipe due to MTBE's toxcity and environemntal impacts. As for building Mexico's cane industry, the issue is "energy independence". Where does the independence come from if once again we're dependant on foreign sources?

.... Well, for the sake of conversation, "energy independence" is political cotton candy for the those that like that kind of stuff; ......"ain't gonna happen". What is likely to, and should rule if policy doesn't distort things too much, is the economic principle of "relative advantage" ie...... that is if Mexico can make ethanol out of cane far more efficiently than we can we've a great opp to trade for airplanes etc. and more of them can stay home with their families. BTW though no politico is going to admit it the future of Mexico and the Americas is that of cooperation somewhat like the EU; they've resources that compliment ours and a youthful and energetic labor pool while ours is scarce and aging; have of all Mexicans were born after 1970. The "Mexican problem" is not a problem at all; properly handled to our mutual benefit our impoverish neighbor is an asset; and one that frankly deserves a break.


Furthermore, the subsidy functions as a price support to the corn growers whose operating costs are beginning to outstrip the cost they can recoup in the foods market. How long can you operate if the profit you receive for your product doesn't even cover your production costs? Not long. This also ties into the issue of "independence".


.............. Hmmm, so summing up: The hefty subsidy for turning food into gasahol and $100 oil is just the thing for making sure we've Corn Flakes and the Mexicans have tortillas? Now why was it that corn prices didn't cover production costs? Wait! I know it's because "supply and demand" fails when there are many, unorganized sellers and few very organized buyers. Exactly why we've had crop, price supports forever. As for "independence" have you run the numbers on what eth can contribute using the rosiest scenario?

Conservation, while not the whole answer either, is still the cheapest, cleanest, most readily available "alternative" and the steep drop in demand after Carter put in the CAFE stds and Americans responded to the high prices of the 70's is what broke the OPEC cartel; it we had the slightest support and leadership from the White House we could do it again, after all we're the customer that uses/wastes one quarter of the world's energy with but 5% of its population.

All this talk about globalization and one great big happy economic family is a touchy feely sentiment that has no reality.

........... A---men!!

And the government is beginning to recognize that fundamental fact.


........... Or at least it's becoming an issue in the election. The current government is the cabal that did the most to create the "new world order" and all who've been in power since 1980 are guilty of flying us up this blind canyon, though to be fair the citizenry have been idiots as well.

neilehat

Nelson, Frederic was one of the great "sophists" of his age, or as Mencken would declare, "one of the great fly-catchers of all time." Although, his countrymen paid him little heed in building the First Republic while he sat comfortably in England hanging with the Anticorn League. And I ask, "Where is Liberty and Freedom in a Nation that lies prostrate and bankrupt. Unable to put even a morsel of bread in its own mouth; except by the kindness, generosity, and charity of other Nations?"

Jack, Yep! "The times they are a changin" Hopefully for the better, maybe for the worse, or someplace in between. Only time will tell ...

n

http://www.theonion.com/content/node/46932

Darek

Furthermore, the subsidy functions as a price support to the corn growers whose operating costs are beginning to outstrip the cost they can recoup in the foods market. How long can you operate if the profit you receive for your product doesn't even cover your production costs? Not long. This also ties into the issue of "independence".

Jack

"Furthermore, the subsidy functions as a price support to the corn growers whose operating costs are beginning to outstrip the cost they can recoup in the foods market. How long can you operate if the profit you receive for your product doesn't even cover your production costs? Not long.

...... While finding some subsidies worthwhile, some times, I can't help wonder how long WE can operate if we've too many subsidies and particularly too many that are create distortions, thus wasted resources, and that are not justified in terms of generating a clear societal good.

IF ethanol proves not to be a scam and its future benefits outweigh the costs of the subsidy and the run-up in food prices around the world; I'll agree that the program was a "societal good". As just one of many taxpayers, would it be unreasonable to expect the ethanol scheme to return as much benefit as would the same amount invested in the conservation of energy sources?

onix

population growth does require a strong ecological tax on the lands, wich tends to make them less productive. Also, major concern is the lack of availability of staples, not the capacity of fuel to transport them, that besides in your optimistic scetch you assume poorer nations will use energetically more expensive methods. As such population growth not only directly drives up fuel consumption, but also through food consumption, (and the extra use of other resources like water that need an energy investment) Endpoint is we should care about feeding people, when there just isn't enough food, saying food scarcity is due to high fuel prices makes not much sense. There is actually a fuel scarcity as well, and the only thing that could be done against that would be having prioritys. Food should always be the first one, not the rich (oil/cars) or religion, birth explosion, really.

linda fulponi

excellent analysis of 'wacky' policies causing major harm.

I am intrigued by the world bank food price index you refer you. Would you be able to send me a link or reference to this indicator, as i have not been able to find it in their data bank and i think it could carry quite useful information.

thank you
linda fulponi

PJB

It's really disheartening to hear folks criticize the free market and blame laissez faire for the increase in food prices. Some of this increase is no doubt due to increased worldwide demand. However, it is wrong to characterize the food supply system as a free market. It is not, especially in this country.

As Kevin Hassett reported in an opinion today (4/21) on Bloomberg, a World Bank report stated that "almost all of the increase in global maize production from 2004 to 2007 (the period when grain prices rose sharply) went for biofuels in the U.S." Subsidies, by their nature, are designed to make uneconomic investments economic. It's therefore hard to believe that if the free market were left to function on its own (i.e., no ethanol subsidy) we'd see all of the marginal production of maize diverted to an uneconomic production of biofuel.

Ethanol subsidies aren't the only outrageous subsidies that US farmers enjoy that interfere with the free market. If you want to make yourself sick, I highly recommend you spend some time reading the following (read the whole transcript):

http://www.pbs.org/moyers/journal/04112008/transcript4.html

To sum it up, FA Hayek said it best..."the more we try to provide full security by interfering with the market system, the greater the insecurity becomes; and, what is worse, the greater becomes the contrast between the security of those to whom it is granted as a privilege and the ever increasing insecurity of the underprivileged."

Anonymous

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