Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

America's Crazy Habit of Turning Corn into Fuel Instead of Food

Commodities / Ethanol Dec 22, 2009 - 01:33 AM GMT

By: Justin_Rohrlich

Commodities

Best Financial Markets Analysis ArticleAccording to a recent Congressional Budget Office report, the increased use of ethanol is responsible for a rise in food prices of approximately 10 to 15 percent.

Why?


We're turning corn into fuel — a highly inefficient one, at that — instead of food.

The Mackinac Center for Public Policy points out that "mixing food and fuel markets for political reasons has done American consumers no discernable good, while producing measurable harm."

However, perhaps summing up the issue most succinctly is Mark J. Perry, professor of economics and finance at the University of Michigan-Flint:

Anytime you have Paul Krugman agreeing on ethanol with such a diverse group as the Wall Street Journal, Reason Magazine, the Cato Institute, Investor's Business Daily, Rolling Stone Magazine, the Christian Science Monitor, The New York Times, John Stossel, The Ecological Society of America, the American Enterprise and Brookings Institutions, the Heritage Foundation, George Will and Time magazine, you know that ethanol has to be one of the most misguided public policies in US history.

But Brazil seems to have made it work. Using just 1 percent of its arable land, Brazil produced 6.57 billion gallons of sugar ethanol last year, roughly half the annual oil production of Iraq. Ethanol accounts for about 50 percent of Brazil's automotive fuel. General Electric and Brazilian aircraft maker Embraer are working to develop ethanol suitable for powering commercial aircraft, with a test flight possible by early 2012. Most importantly, Brazil relies on imported oil for only 10 percent of its energy needs today — due in large part to its ethanol industry.

So, what's Brazil doing right?

The answer is simple. Unlike the United States, Brazil makes their ethanol from sugar, which yields over eight units of energy for each unit invested, whereas corn-based ethanol yields a paltry one and a half units of energy for each unit invested. Sugar-based ethanol is also cheap to produce, at only 60 cents a gallon.

It seems so obvious. An alternative fuel that works already exists. What's stopping us from using it?

What's stopping us is a decision made 36 years ago by a man named Rusty Butz, before ethanol was even a blip on anyone's radar.

In 1973, Earl "Rusty" Butz, President Nixon's USDA chief, did away with the agricultural price supports introduced by the Roosevelt administration. These supports were intended to protect farmers' finances by limiting supply when bumper crops would have otherwise flooded the market and to avoid squeezing consumers by releasing the warehoused grain when crop yields were low and prices would naturally spike.

"An alternative fuel that works already exists. What's stopping us from using it?"

Butz ginned up political support for the administration by encouraging farmers to plant "fencerow to fencerow" while the government provided them with subsidies to cover the difference between market prices and production costs.

Of course, growing "fencerow to fencerow" did exactly what one would expect: production exceeded demand, and prices took a dive. This didn't sit too well with Archer Daniels Midland (ADM), the nation's largest corn refiner.

Now, there's only so much corn one person can eat. ADM suddenly needed to figure out how to somehow stimulate sales of all that excess food.

Then a Japanese technique called "wet milling" caught the company's eye. Wet milling turned corn kernels into what ADM hoped would be a low-cost alternative to sugar — the now-ubiquitous high-fructose corn syrup.

While high-fructose corn syrup was an alternative to sugar, it still wasn't possible to manufacture cheaply enough to make it a low-cost alternative.

Enter Dwayne Andreas, who, at the time, was ADM's CEO.

It just so happened that Florida sugarcane growers were in the middle of a push to get Congress to impose a tariff on foreign sugar, which was exerting downward pressure on market prices. Andreas decided to help fund lobbying efforts by Florida sugarcane growers to convince Congress to impose a quota on non-US sugar, which had been flooding the US market and keeping prices down.

In short, ADM backed its competition's political agenda and, when Ronald Reagan took office, the sugar tariff was swiftly ushered into place. Naturally, sugar prices escalated, eclipsing the cost of ADM's high-fructose corn syrup. Soft-drink makers like Coca-Cola and Pepsi switched to the cheaper alternative in short order.

Perhaps this is why a statue of Ronald Reagan stands at ADM headquarters. It is a token of appreciation from one free marketeer to another for promoting what is, essentially, a socialist policy.

ADM's CEO, Andreas, doesn't seem to view our capitalist society through the same lens as most others. In one interview, he said, "There isn't one grain of anything in the world that is sold in a free market. Not one! The only place you see a free market is in the speeches of politicians. People who are not in the Midwest do not understand that this is a socialist country."

From the looks of things, "socialism" has done well for Dwayne Andreas. A report by James Bovard of the Cato Institute notes, "At least 43% of ADM's annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM's corn sweetener operation costs consumers $10."

Minyanville professor and Houston fund manager Ryan Krueger says,

The sugar tariff is the biggest scam since one hour Martinizing. For the first time in human history, more than a billion people this year will be classified as 'chronically hungry.' We'll artificially sweeten prices for US farmers, bankrupting poor farmers in Africa or South America and then turn around and send them food aid.

He continues,

The world sugar price is 22 cents per lb. The US price because of the tariff? 44 cents. Want to make candy and buy sugar for 22 cents? Sorry, no can do — it's illegal. If sugar prices plummet? Don't sweat it, Washington's got that covered, guaranteeing a price of no less than 18 cents.

Surely, there must be more to this story.

Nope.

In Krueger 's words,

I'd love all the upside and none of the downside in a game where my competitors are barred from playing against me, yet if I still somehow fail to perform the scoreboard operator nonetheless puts up points for me — as long as I vote for the right referee when his contract's up.

Okay, so ADM hijacked the sweetener market. What does this have to do with Brazilian ethanol and our country's insistence on forging ahead with subpar ethanol made from corn, even though tariff-free cane ethanol would cut gas prices significantly?

The path leads directly to good old political back-scratching.

You'd be correct to assume that demand for soft drinks drops during the cold winter months. What would ADM do with idle wet-milling equipment during high-fructose corn syrup's "off season"?

It turns out that wet-milling machines also make ethanol.

The federal government provides a 45 cent per-gallon subsidy for domestically produced (corn-based) ethanol. Add to that the crippling sugar policy, plus a 54 cent per gallon tariff placed specifically on foreign ethanol (sugar based, from Brazil), and bang — ADM corners the domestic ethanol market. Pretty crafty, huh?

California Governor Arnold Schwarzenegger says, "The federal government is subsidizing corn-based ethanol and we have a tariff of 54 cents-a-gallon on the most important ethanol to discourage cheap fuel coming in from Brazil. This is crazy."

Fed Chairman Ben Bernanke says, "As you know, I favor open trade and I think allowing Brazilian ethanol, for example, would reduce costs in the United States."

And C. Ford Runge, an economist specializing in commodities and trade policy at the Center for International Food and Agricultural Policy at the University of Minnesota, says, "the obvious thing to do is lower that [sugar] tariff and let some Brazilian ethanol come in. But one of the fundamental reasons our biofuels policy is so out of whack with markets and reality is that interest-group politics have been so dominant in the construction of the subsidies that support it."

Until corporate welfare takes a backseat to real, proven solutions that help stateside consumers save a bundle at the pump (and help our less-prosperous allies financially), corn will remain king.

Justin Rohrlich is the Emmy Award–winning head writer of Minyanville's World In Review, the world's first (and only) animated business news show. See his Minyanville bio and archive. Send him mail. See Justin Rohrlich's article archives. Comment on the blog.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in