I oppose all agricultural subsidies and have for more than 40 years. I oppose ethanol subsidies.
However, I sincerely wish that well-intended economists and reporters would stop parading their ignorance and making bogus arguments viz.:
That’s why this story in yesterday’s New York Times about size of corn reserves caught my eye. The story says that, because of increased use by ethanol producers, the demand for corn in the U.S. is so high that reserves are at their lowest level in 15 years and prices are going up significantly (Note: the ethanol folks deny this). This is expected to affect consumer prices both on products that include are corn itself — chips, creamed, on the cob, salsa, etc. — and those where corn is a major component like soft drinks and gasoline.
Consider the chart above which presents a breakdown of how we use corn in the United States and how that’s changed over time. The chart makes quite a number of things very clear.
First, by far the greatest amount of our domestic usage of corn is for livestock feed. It accounts for something like 50% of all corn utilization. Most corn that we export is also used as animal feed and when you add those two together it’s practically three quarters of the whole. Second, do you see that orange band innocuously labelled “FSI less ethanol”? That’s all other food uses for corn including high fructose corn syrup, corn as an ingredient, everything. Between them ethanol and FSI account for, maybe, 20% of utilization. Do the math. Demand for ethanol as vehicle fuel isn’t causing the price of corn to double. Worldwide increased meat production is the culprit.
If there’s increased lobbying for subsidies for corn, it will be due to rising costs of meat and, indeed, I think that’s pretty likely. How you reconcile calls for Americans to consume less meat with higher subsidies for corn production is beyond me but I’m sure they’ll find a way.
While we’re on the subject practically all of those fields of corn that you see covering the Midwest are yellow corn. White corn is the corn used for masa for tortillas and most human consumption and it’s much more expensive than yellow corn. We’d produce more white corn here if countries like Mexico didn’t subsidize their farmers to keep American white corn non-competitive.
My point here is that U. S. ethanol subsidies aren’t causing world food prices to rise. They’re dumb but not dumb for that reason. Food prices are rising because of bad weather in a lot of places, China consuming more, and bad laws in most places including here.
There’s a much better argument that European subsidies of biodiesel are causing food oil prices to rise worldwide. The rapeseed and mustard seed used in European biodiesel are actual human food and the EU produces a lot of them.
I think the third point about the chart is the overall rise in production and the smoothing of spikes over time. I believe those are the most proximate result of subsidy policies. They encourage more fields to be placed into corn production and reduce the risks of overproduction.
I believe the subsidies are primarily about balance of trade, and the other arguments for them are secondary.
This post caught my eye as we have (and do) owned a number of companies with significant exposure to commodity raw materials, and I’m not sure I can arrive at the same conclusion you have.
First, by their very nature commodity prices respond in a volotile manner at the margin (of supply/demand/current stocks), not just due to the major useage drivers. We owned a company whose primary raw material input was epoxy resin. Early in the investment period consumer electronics demand – the primary useage – (circuit boards) drove prices. Later, it was Blue Ray discs. More recently, wind mills came on the scene. (used in the blades) The point being that supply (capacity) and demand fluctuated, and with changing variables at the margin.
Back to corn. I took a quick look at a price history. Ag commodities obviously have alot of volatility. But from 1980 to 2005 the long term “eyeball regression” seems to be about $2.25 per bushel, with a temporary trough at about $1.60 (1987) and a temporary peak at $3.60 (1997), but no long term trend. BUT………
Starting in 2005, which I believe is the year the ethanol mandates came into law, we see prices heading right up – into the $4.50 range – and whatever it is today. Chance? Probably not. Exports? Perhaps.
No doubt a number a factors are at work currently. (And, if I can take a liberty – I think resolving whether QE is driving commodity inflation or not would be a fascinating topic for GE.)
But to deny that ethanol demand is not a factor is, I think, to make the same mistake as not recognizing any other longer term variable, such as meat consumption, or shorter term issues like weather and crop yields.
I’m not saying it’s not a factor at all. I’m saying it’s not dispositive. Other factors, particularly higher exports of corn for use as animal feed overseas, are more important. Unless somebody can find a way for 10% of the consumption being responsible for 50% of the increase in prices.
If you look at price as your metric, I believe weather will be the key factor along with the long-term impact of higher yields. The wet stuff that was nearly rotting in the fields a couple of years ago went to the ethanol plants, who had so much they dropped prices like a rock, while the price for higher-quality dried yellow corn was high. I think farmers like, having more than anything, diversified sales opportunities.
Also, ethanol production only consumes the starch, so the protein and fiber are used in animal feed. China is accusing the U.S. of dumping these distiller’s grains.
PD –
Yes, in the short run weather dominates ag commodities. However, you generally get a reset with each year’s crop. Long term price trends require longer term issues.
Dave –
No, its not dispositive. However, the 10%/50% analysis just isn’t how it works. Its the effect that a variable has on the level of stocks that creates price moves, often significant ones. That variable doesn’t necessarily have to be the major useage variable, it just needs to be significant relative to the size of the stocks.
Looking at the graph it actually appears that ethanol utilization has had the largest percentage increase, although exports have been rising as well. Does it mean the “cause” is meat vs ethanol – or the other way around? No. Probably both are significant factors. Although one has to wonder why annual corn prices took off in the same time frame as the ethanol legislation.
Perhaps the more interesting question is why corn production has not accomodated these long term increases in demand and reduced the price trends.
I know, let’s start a conspiracy theory: IL and IA farmers as OPEC………..
So, should we end the subsidies?
Before I saw the comments I was going to go with “but price is set at the margin.” I see Drew got there first.
We have ag subsidies and ethanol subsidies. It would be a very different world with neither. Quite possible corn derived products would be more expensive, but quite possibly that is what we need.
(Recent evidence is the fructose does indeed affect the brain’s appetite control circuits.)
jp, I agree. Without the totality of the subsidies, including the price-floors and subsidized corp insurance and more programs than I can count, there would certainly be less corn produced. And maybe that would be for the greater good; I am suspicious of corn syrup replacement of sugar.
This is not intended to “grind it in,” but as an example, we were looking at a company a couple of years after Hurricane Katrina whose economic perfomance was derived in large part from capital expenditures in the coal mining business, in turn driven by natural gas prices.
(All numbers rounded, because the case is easily made.) After Katrina, natural gas (wellhead) prices basically doubled. Lost gas production? Admittedly, an estimate: 700MM cubic ft per year. Consumption? There are several estimates, but they range from 18 trillion to 20 trillion per year. (Don’t know why the discrepancy, but you get the point.)
By the way. We didn’t buy the company. Markets adapted; the spike in performance faded. The DOE produces a fantastic report on “all things energy” for those who are interested. Of note to my global warming friends: look at the projections of carbon dioxide emmisions even with robust assumtions for “clean fuels” etc. Nary a dent. And that’s without China etc.
You better hope I’m right, people. You better hope I’m right.
That’s my complaint about the prescriptions for dealing with global warming. Unlike Drew, I think that anthropogenic global climate change is not only likely, it’s practically certain.
However, the prescriptions don’t appear to me to be matched well to the problem.
It occurs to me I shouldn’t have just cited the DOE website. Search for the DOE “Annual Energy Outlook.”
Most people would be appalled at the dryness of it, although probably not those who run or a number who frequent this site. Its a great way to get a basic primer and factset in the arena of one of the most crucial issues the country faces today.
As they say in snooty eateries: “enjoy.”