Ethanol Dominoes: Are corn ethanol subsidies really taxes on the poor?

A student came in my office last week and asked: Aren't ethanol subsidies just implicit taxes on the poor?  I thought about it for a minute, then said, "Yep."  The United Nations World Food Programme agrees--sort of:

The demand for food as an input into energy production, whether it's biodiesel or bioethanol or any of these, is a global phenomenon. And it affects everything from palm oil to cassava to everything else … There isn't much marginal room in the global food supply system. ...Now, there's a point at which it doesn't economically make sense to buy food as an energy input. It's pretty low; it's apparently when oil hits about $70 a barrel. So anything above that makes food a very viable energy production input.

In other words, higher subsidies for ethanol lead to less food at higher prices.  Subsidies for ethanol are an implicit tax on food.

Comments

[joshua corning]

Subsidies for ethanol are an implicit tax on food.

The problem is compounded with food subsidies, terriffs, price controls and dumping...all are built in to the world wide ag industry. Essentially the last 50 to 100 years of food socialization has made food production incapable of adjusting to market demands and stabilizing supply and prices.

To say that ethanol is the culprit is a bit of an underestimation.

But I got to admit I am liking how the worlds poor are hating the worlds rich over their solution to global warming. Pure cake in my book and well worth the extra buck for a Big Mac.

(Note: when i say worlds poor i mean ppl who make less then 10$ a day and by the world's rich I mean college economic professors who advocate for dickering with the world's economy to "fix" global warming)

[David Zetland]

Don't forget the opportunity cost of tax money diverted from projects that might help the poor (education, health) to agri-business companies (and politicians) who looovvvvee corn subsidies...

You didn't mention, but I am sure you know, that higher prices *do* help some farmers, but most of the world's poor are net consumers of corn, etc.

[joshua corning]

but most of the world's poor are net consumers of corn, etc.

Most of the world's rich are net consumers of corn...in fact most of the world's middle class are net consumers of corn...

In fact I am willing to go out on a limb and say most of the world's people are net consumers of corn.

By the way higher prices in a free market increase the incentives to produce more which in turn lowers prices...wow it is almost like a self regulating system without the need for government intervention....which begs the question why do we have so much government intervention in ag?

[Matt Bogard]

I agree, other than to reward rent seekers I see little need for such subsidies. Modern agriculture, which is a very information driven, resarch and capital intensive industry is in no more need of federal funding than say the pharmaceuitcal industry. And markets are dealing with the current situation quite well.

According to a recent study :
Link
http://www.ethanolrfa.org/objects/documents/1157/food_price_analysis_-_urbanchuk.pdf

“Increasing petroleum prices have about twice the impact on consumer food prices as equivalent increases in corn prices”

It is true that subsidies may distort land prices and have other negative effects, but they are not leading to large inventories and surpluses as they did in the past. In fact, inventories have been very tight in later years, even before the large ramp up in ethanol production. Markets are responding to the current situation with advancements in genetics and technology which are allowing producers to continue to meet our demands for both food and fuel with minimal impacts on the prices consumers pay for food. This past year the markets have responded via producers planting the largest corn crop since WWII. With ethanol, we don't want to fall prey to the 'eat a steak starve an african' fallacy. Most of the corn ( and the resulting reduced soybean supplies) going to ethanol production is feed grade, not food grade, i.e they are not close substitutes in production. The impacts are much greater for producer costs vs. consumer's meat and food ingredient consumption prices. With additional market reactions, ( this year Pioneer is offering 20 -30 high fermentable starch varieties)the ability to substitute even feed grade corn for ethanol -grade corn will be even less.

To me the reasoning behind opposing agricultural subsidies is much more clear from a public choice/proper role of government perspective vs evidence of higher food prices.

[Don]

Dear Matt: How would you weave the negative externality of CO2 into your take on subsidies to Big Ag?

[Matt Bogard]

Don, I may be missing your point, but I'll elaborate as best I can. With regard to ethanol production, I think the jury is out on energy balance and emissions. According to David Pimental of Cornell University, the production of ethanol requires almost 30% more energy to produce than it provides as a fuel. Another study from UC Berkeley concluded that ethanol is less fossil fuel intensive that gasoline production, but has greenhouse emisisions similar to gasoline. Finally a researcher at MIT reports a slight advantage for gasoline, but one that can easily be overcome via technological breakthroughs in the near future. According to research from a Proceedings of the National Academy of Sciences study ethanol yields 25% more energy than the energy invested in its production, whereas biodiesel yields 93% more.

So I don't necessarily believe that federal ethanol subsidies are necessarily creating exteranlity issues with regard to CO2 or other GHGs. ADM or the like 'Big Ag' may be seeking rents via lobbying for prolonged and increased subsidies making the argument that ethanol use will reduce emissions- but I would like to see science suporting that.

Another take is the growing voluntary market for agricultural carbon credits. These certainly encourage sustaianble practices like no-till (which is higly correlated with reduced toxic pesticide and herbicide use via biotech crops) as opposed to conventional tillage and organic practices ( i.e. decreasing externalities on many levels). The carbon credit aggregators are professing that should a mandated cap-and-trade system be implemented they are set to make a lot of money. We must also consider the 27 companies in the USCAP ( U S Climate Action Partnership) such as GM, GE and others that are certainly out to make money if they can have regs and subsidies tweaked to their favor as well, all under the guise of alleviating CO2 externalities.

References:
http://environment.newscientist.com/
Natural Resources Research, vol 14 p65
Science, vol 311 p 506
Tiffany Goode, MIT (Graduate Student)
PNAS July 25, 2006 vol. 103 no. 30

[Matt Bogard]

With regard to externalities related to ethanol subsidies, and implcit taxes on food here's a thought-Perhaps if this trend continues, there may be positive benefits to the environment as more buyers start to purchase more environmentally friendly GMO corn vs. non-GMO due to increased prices from ethanol demand.

Increased adoption and acceptance of GM varieties would lead to increased supplies long term which would be better for the poor. Perhaps another question to ask would be 'are government policies in opposition to GM foods an implicit tax on food?'

Mikio Shoji, director at Nihon Shokuhin Kako, a subsidiary of Mitsubishi Corp. which buys more than 750,000 tons of the grain annually makes the following comments:

“We have no choice but to use GMO corn, as the grain is becoming increasingly costly and the price differential between GMO and non-GMO supplies is widening."

"Given soaring costs for non-GMO corn, it's an inevitable move and will be followed by other food makers in Japan," another quote from Takaki Shigemoto, an analyst at Tokyo-based commodity broker Okachi & Co.

Luckily Japan is one place where regulators are not trying to keep GMO's out.

See the full story : Japan food maker starts buying genetically modified corn

- Bloomberg via Taiwan News, Apr. 15, 2008
img=logo_world&cate_rss=WORLD_eng

[Ames Tiedeman]

Corn ethanol is not the future. We need to move the the Hydrogen economy now. Not in 25 years.

[TheSUBWAY.com]

We found an interesting article about the problems with Ethanol on ConsumerReports.org:

http://blogs.consumerreports.org/cars/2008/03/ethanol-e85.html

"But there are some problems with increasing ethanol blends. Ethanol contains less energy than gasoline, so increasing the amount of ethanol in gasoline will likely result in lower fuel economy. Increasing standard fuel blends from zero to 10 percent ethanol, as is happening today, has little or no impact on fuel economy. In tests, the differences occur within the margin of error, about 0.5 percent. Further increasing ethanol levels to 20 percent reduces fuel economy between 1 and 3 percent, according to testing by the DOE and General Motors. Evaluations are underway to determine if E20 will burn effectively in today's engines without impacting reliability and longevity, and also assessing potential impact on fuel economy."

TheSUBWAY.com would like to invite readers to post their own views and ideas in TheSUBWAY.com's Investor Forum:

http://investor-forum.thesubway.com/

[TheSUBWAY.com]

We found an interesting article about the problems with Ethanol on ConsumerReports.org:

http://blogs.consumerreports.org/cars/2008/03/ethanol-e85.html

"But there are some problems with increasing ethanol blends. Ethanol contains less energy than gasoline, so increasing the amount of ethanol in gasoline will likely result in lower fuel economy. Increasing standard fuel blends from zero to 10 percent ethanol, as is happening today, has little or no impact on fuel economy. In tests, the differences occur within the margin of error, about 0.5 percent. Further increasing ethanol levels to 20 percent reduces fuel economy between 1 and 3 percent, according to testing by the DOE and General Motors. Evaluations are underway to determine if E20 will burn effectively in today's engines without impacting reliability and longevity, and also assessing potential impact on fuel economy."

TheSUBWAY.com would like to invite readers to post their own views and ideas in TheSUBWAY.com's Investor Forum:

http://investor-forum.thesubway.com/

[Jay Wardin]

Ethonal, tax on the poor or insurance against famine? When the world has a weather event that creates world wide crop failure the crops being stored and grown for ethonal production can and will be returned to the food supple. Thus the the bio fuels industry is a defacto food reserve. The realities of farming is that most fo the worlds food production is subsidized. As subsidises are lowered or the cash price of grains are fall more land becomes uneconomical to farm; thus less food. On the other hand as prices go up, subitizes are reduced and more food is produced. As corn prices go up a farmer can spend more money to improve yield by buying better seed for example. Today due to efficencies in farming food is cheap enough to make fuel out of it. The fact is that North and South American farmers are so efficent in farming it has made farming small plots in the 3rd world non-econimcal. The UN does not send grain to poor countries it send money to buy local grain even when grain from the Americas is 1/4 the price. Tec data: There are 56 lbs in a bushel of corn. At $5.60 a bushel that is $.10 a pound. Add water to make cornbread (1/2 water) and the corn input cost is $.05. We in The EU have 4 to 6 times the goverment farm subsitizes as the USA. (as per the Economist) Corn was €3.20 in 2001 and is €3.4 today.

[joshua corning]

Corn ethanol is not the future. We need to move the the Hydrogen economy now. Not in 25 years.

I am not sure what the future is...Hey i have an idea instead of pumping billions of tax payers money into what may turn out to not be the future how about we let these energy alternatives compete in a fair open and free market and let the most efficient cost effective alternative win out?

Oh wait i forgot...this would be capitalism...and capitalism is EVOL!!!!!!

[joshua corning]

Ethonal, tax on the poor or insurance against famine? When the world has a weather event that creates world wide crop failure the crops being stored and grown for ethonal production can and will be returned to the food supple. Thus the the bio fuels industry is a defacto food reserve. The realities of farming is that most fo the worlds food production is subsidized. As subsidises are lowered or the cash price of grains are fall more land becomes uneconomical to farm; thus less food. On the other hand as prices go up, subitizes are reduced and more food is produced. As corn prices go up a farmer can spend more money to improve yield by buying better seed for example. Today due to efficencies in farming food is cheap enough to make fuel out of it. The fact is that North and South American farmers are so efficent in farming it has made farming small plots in the 3rd world non-econimcal. The UN does not send grain to poor countries it send money to buy local grain even when grain from the Americas is 1/4 the price. Tec data: There are 56 lbs in a bushel of corn. At $5.60 a bushel that is $.10 a pound. Add water to make cornbread (1/2 water) and the corn input cost is $.05. We in The EU have 4 to 6 times the goverment farm subsitizes as the USA. (as per the Economist) Corn was €3.20 in 2001 and is €3.4 today.

Putting aside his insane idea that subsidies lower the cost of food can someone please tell jay that in the US the government pays farmers not to grow food? I just don't have the heart to do it.

[john]

1. I may be wrong, I frequently am, and I do not wish to come across as overly pessimistic, but...I seem to remember reading somewhere that it take more energy to produce a car than it will ever use in its lifetime. The real problem is not the kind of fuel that you have in your cars, but that you have cars at all. Bio fuel is just a quick, politically motivated fix.

2. In the real world, where we can learn almost as much from history as from models (the horror), can't see what is wrong with industrial policy, certainly pour more money into alternative technologies. Industrial policy can work like in Japan, Korea, France, Taiwan, Germany, Taiwan, Singapore, China (possibly)....