Environmental Economics

Follow the bouncing ball of ethanol policy

I'm just going to leave this here. I have no idea where to start...

 POET announced today it will idle production at its bioprocessing facility in Cloverdale, IN due to recent decisions by the Administration regarding SREs. The process to idle the plant will take several weeks, after which the plant will cease processing of over 30 million bushels of corn annually and hundreds of local jobs will be impacted.

POET has reduced production at half of its biorefineries, with the largest drops taking place in Iowa and Ohio. As a result, numerous jobs will be consolidated across POET’s 28 biorefineries and corn processing will drop by an additional 100 million bushels across Iowa, Ohio, Michigan, Indiana, Minnesota, South Dakota, and Missouri.

“The Renewable Fuel Standard was designed to increase the use of clean, renewable biofuels and generate grain demand for farmers. Our industry invested billions of dollars based on the belief that oil could not restrict access to the market and EPA would stand behind the intent of the Renewable Fuel Standard. Unfortunately, the oil industry is manipulating the EPA and is now using the RFS to destroy demand for biofuels, reducing the price of commodities and gutting rural economies in the process,” said POET Chairman and CEO, Jeff Broin.

The RFS authorizes small refinery exemptions for refiners that (1) process less than 75,000 barrels of petroleum a day and (2) demonstrate “disproportionate economic hardship.” Over the past two years, the EPA has issued waivers to refineries owned by ExxonMobil, Chevron, and other large oil companies—none of which are small and none of which have economic hardship. 

EPA’s mismanagement of SREs has created an artificial cap on domestic demand for ethanol and driven RIN values to near-zero, which weakens the incentive for retailers to offer higher blends. Oil is making billions of dollars, yet still using EPA to stop biofuels growth by handing out hardship waivers to some of the wealthiest companies in the world, in contradiction with President Trump’s public comments. So far, the EPA has cut biofuels demand by 4 billion gallons and reduced demand for corn by 1.4 billion bushels, causing severe damage in rural America. 

“POET made strategic decisions to support President Trump’s goal of boosting the farm economy. However, these goals are contradicted by bailouts to oil companies. The result is pain for Midwest farmers and the reduction of hundreds of jobs and hundreds of millions of dollars of economic activity across Indiana.” said POET President and COO, Jeff Lautt

The recent announcement of 31 new waivers comes in steep contrast to the President’s roll out of year-round E15 earlier this summer. The SREs are wiping out any near-term growth potential for year-round E15 and challenging the President’s promises made to family farmers and rural communities. The President now has the opportunity to show his leadership on this issue and turnaround the rural economy. 

“My long term fear isn’t for the biofuels industry, it’s for rural America. POET can continue to produce ethanol with cheap grain, but we don’t want to lose our family farmers. The EPA has robbed rural America, and it’s time for farmers across the Heartland to fight for their future” said POET Chairman and CEO Jeff Broin.

Quote of the Day: Word Salad

“I did say, ‘Well, the United States right now has among the cleanest climates there are based on all statistics.’ And it’s even getting better because I agree with that we want the best water, the cleanest water. It’s crystal clean, has to be crystal clean clear.”

President Trump to an interviewer after meeting with Prince Charles to discuss climate change

AERE sessions at the SEA meetings are posted @AEREorg

There are 17 sessions with 5 papers each (no discussants), 3 student sessions (with discussants, organized by Elaine Frey) and 1 panel discussion (the last session so attendance will be lower than our usual "tips" session):

Tips for Students and Newish Economists

Moderator: Elaine F. Frey, California State University, Long Beach

Panelists:

• Jill L. Caviglia-Harris, Salisbury University, "Applying Design Concepts to Increase the Impact of your Presentations"
• Christopher F. Dumas, University of North Carolina - Wilmington, "Adding Logic and Proof Concepts to Your Intro Courses"
• Sarah Andrea Jacobson, Williams College, "Social Media but in a Way That's Kind of Useful"
• Will Wheeler, U.S. Environmental Protection Agency, "Writing Grants is a Skill: Tips for Success"
• John C. Whitehead, Appalachian State University, "Consulting on the Side"

Here is the link to all of the sessions: https://www.southerneconomic.org/current-year-program/?conferenceId=4&organizationId=2.

 

Daily Demand and Supply: Where's the Beef? (and cheese and soybeans)

Following the political dominoes of international trade policy can be mind-boggling, but the basic economic principles can be simple.  A tariff placed on U.S. products by another country (like meat, cheese, and soy beans) will reduce the amount (supply) of U.S. meat, cheese, and soy beans sold in other countries, and increase the amount of meat, cheese, and soy beans available for the U.S. market.  In the U.S. market, this represents an increase in supply which will increase the amount meat, cheese, and soy sold in the U.S. and decrease the price of each good. 

How big can this effect be? 

Here are soybean futures prices in the U.S. for the last three months (from NASDAQ):

And here's a VOX story about the current supply glut of meat and cheese in the U.S. (only partially caused by tariffs, and partially caused by other interesting agricultural policies), which will eventually cause meat and cheese prices to fall in the U.S.

There’s a lot of uncertainty these days. So here’s a comforting thought: The United States of America will not run out of cheese or meat anytime soon.

US dairy producers now have a 1.39 billion-pound surplus of cheese, according to data from the US Department of Agriculture. As the Washington Post has noted, that’s the largest domestic reserve of cheddar, Swiss, American, and other cheese varieties on record.

It means there’s enough excess cheese to arm each American citizen with a hefty 4.6 pounds of the crumbly, melty, salty good stuff. Why is this happening? Simply put: US dairy producers have been overproducing milk. Thanks to selective breeding, American cows are more productive than ever. And when demand for milk and dairy goes down in the summer, dairy producers store their excess milk as cheese, which has a longer shelf life in cold storage.

A similar glut exists for the meat industry. According to new data from the USDA, American meat producers now have 2.5 billion pounds of chicken, turkey, pork, and beef in cold storage, which is also a record, according to the Wall Street Journal. And producers are running out of warehouse space to store it all.

The meat stockpile is in part, the Journal reports, because of newly implemented Chinese and Mexican tariffs on American pork. These were set in retaliation for tariffs the Trump administration placed on Mexican and Chinese steel, among other goods. With slowing exports — and increased beef and poultry production partially due to falling prices of grain — American meat producers have more product in the freezer. Though that might be good news for American consumers, as meat prices are likely to drop a bit at the grocery store. (As Vox’s Tara Golshan reports, the escalating trade conflicts will likely impact the dairy industry as well.)

The upshot:  The increase in domestic supply caused by increased tariffs on U.S. products sold oversees will benefit U.S. consumers (through lower prices) and harm U.S. producers (through lower prices).

    

Daily Demand and Supply: Who else ya' gonna call when you have a bourbon-related supply decrease paired with a negative environmental side-effect? We'll be waiting by the phone.

I'm not sure how I missed the original story, but I'm surprised John and I weren't the first call when this happened:

Whiskey barrels were piled in a mountainous heap Wednesday after the rest of a whiskey storage warehouse collapsed in Kentucky, nearly two weeks after part of the decades-old structure came crashing down.

The remainder of the massive structure collapsed at the Barton 1792 Distillery in Bardstown, Nelson County Emergency Management spokesman Milt Spalding said. No injuries were reported in either collapse, he said.

"It is a mountain of bourbon barrels," he said Wednesday.

Environmental and wildlife officials were on the scene to determine if any whiskey spilled into a nearby waterway, he said. The distillery owner Sazerac, a Louisiana-based spirits company, already was facing a state fine stemming from the initial collapse.

 

Thank you EU, I guess this means more cheap whiskey for me...oh, and there's an economic lesson in here too.

Don't take this as support for tariffs, my inner economist is strongly opposed to tariffs on economic efficiency grounds, but my inner hillbilly is slightly happy that an EU tariff on American whiskey is likely to lower U.S. whiskey prices (at least in the short run).  Life can't be all beer...

Jack Daniel’s Tennessee Whiskey prices will rise in the European Union (EU) due to the member countries’ new 25 percent tariff on imported U.S. whiskey.

Brown-Forman Corp. spokesman Phil Lynch told The Associated Press that the price of Jack Daniel’s in the EU will likely rise by about 10 percent, a change which will go into effect over the next couple of months.

For those not familiar with the economics of tariffs, when a tariff is placed on an imported good, the price of that good rises in the importing country.  So let's say for some odd reason, the President of the United States decides to place a tariff on all imported, oh, I don't know, let's say steel imported into the U.S.  (I know, that's far fetched, but go with me here).  The result of the price increase on imported steel is an increase in the price of ALL steel in the U.S.--steel we import, and steel we produce domestically.  The impact on the rest of the world is an increase in the supply of steel on the world market, causing prices for the rest of the world to fall. 

Who benefits?  Domestic steel manufacturers benefit from the tariff on imported steel, because they can now sell their U.S. produced steel at higher prices.  But that comes at an expense--U.S. consumers of steel lose because they have to pay more for steel.  But here's the kicker--the losses to U.S. consumers are GREATER than the gains to U.S. producers.

All of this of course ignores the effects on the rest of the world.  What happens there?  

The manufacturers in the tariffed country (the country producing the good being imported) will lose because they are forced to lower their prices to sell all of the stuff they used to export to the tariffing country.  So when the U.S. puts a tariff on imported steel, manufacturers of steel in the rest of the world are penalized...but consumers of steel in the rest of the world gain from lower priced steel.  But here's the second part of the kicker--the losses to steel manufacturers in the rest of the world are GREATER than the gains to consumers in the rest of the world.

That means that a 'hypothetical' tariff on an imported steel in the U.S. will benefit U.S. steel producers, and steel consumers in the rest of the world.   U.S. steel consumers and steel manufacturers in the rest of the world will take a loss.  And the total losses will ALWAYS be greater than the total gains.  

So I guess you could say that if the U.S. were to impose a tariff on imported steel, it would be a signal that the U.S. likes foreign consumers more than domestic consumers, likes domestic manufacturers more than foreign manufacturers, and likes creating economic losses.

But that's just hypothetical of course.  Let's get back to the more import issue at hand--whiskey.  

An EU tariff on imported U.S. whiskeys will raise whiskey prices to EU whiskey consumers, create an economic gain for EU whiskey producers, create an economic loss for U.S. whiskey producers (probably the whole point), and create an economic gain for U.S. whiskey consumers.

And the total losses will be GREATER than the total gains.

But who cares?

I get cheaper whiskey.

And that's all that matters.

Right?

     

Daily Demand and Supply: Government prevents entire island population from getting crabs*

From NBC.com:

This community voted overwhelmingly for Donald Trump. But now his immigration changes are killing its livelihood — legendary crabs that are a mainstay of the local economy and a regional delicacy.

For decades, Hoopers Island, known for its crabbing industry, has relied on a federal seasonal work program — known as H-2B visas — to keep its businesses humming. This has allowed employers to hire foreigners, mostly Mexican women, to come temporarily to pick crab meat.

But this year, the cap on H-2B visas — and a shift from the first-come, first-served based model to a lottery system that has disadvantaged Hoopers Island seasonal workers — has left the island without 40 percent of the visas they have needed in the past.

The economics here are pretty straight forward.  The number of workers supplied at any particular wage is equal to the number of domestic workers willing to work at that wage, plus the number of H2B (foreign) workers willing to work at that wage.  For example, if the crab-picking wage is $10 per hour, and the number of domestic workers willing to pick crabs at $10 per hour is 100, and the number of H2B workers willing to pick crabs for $10 per hour is 200, then the total number of workers supplied at a wage of $10 per hour is $300.  If the number of H2B visas are cut by 40%, then the number of H2B crab pickers willing to work at $10 per hour becomes 120, and the total number of workers supplied at $10 per hour is now 220.  In other words, restricting the number of foreign workers results in a decrease in the supply of labor to the crab-picking industry.   So what are the effects of a decrease in the supply of labor in teh crab-picking industry?

 

• Wages for crab-picking will increase.  A decrease in supply of crab-pickers will cause the equilibrium price of crab-pickers to increase.  Those crab-pickers who are hired will get higher wages.
• The number of domestic crab-pickers will increase.  At higher wages, the number of domestic crab-pickers willing to work will increase.  Since the supply of foreign crab-pickers has been reduced, a part of the shortage of workers will be filled by drawing new domestic crab-pickers into the crab-picking jobs.
• The total number of crab-pickers will decrease.  As with any decrease in supply, the equilibrium quantity of workers in the crab-picking market will decrease as the supply of workers decreases.  The gain in domestic workers is more than offset by the loss of H2B workers.  

So in the market for crab-picker we will have higher wages for more domestic workers, with fewer H2B workers in the market, and lower total employment among all crab-pickers.  SO if you are a protectionist, this doesn't sound all bad.  We have more domestic workers employed at higher wages.  Right?

Well, sort of.  We also have to think about what else happens.

Right now we have full employment.  With full employment, those domestic crab-pickers have to come from somewhere. The only place from where they can come are other, similar, jobs.  SO another effect is:

• A decrease in supply of H2B workers in the crab-picking industry will decrease the supply of domestic workers in other industries--driving up those wages as well.

But workers getting paid more is a good thing, right?

Sort of, but we have to remember that workers are an input into the production of outputs.  When the price of an input increase, the supply of the output decreases.  This means:

• A decrease in the supply of any output for which wages have gone up will see higher prices and lower quantities produced/consumed.  The decrease in the supply of labor will cause higher crab (and other food goods) prices.

For reference, here's the current price of crabs at a Baltimore area restaurant: 

Males by the Dozen

• Small (5″-5 ¾″) $30
• Medium (5 ¾″-6 ¼″) $48
• Large (6 ¼″-6 ¾″) $68
• XLarge (6 ¾″-7 ¼″) $101
• Jumbo (7 ¼″-8″) $124

Males by the Bushel

• Small $249
• Medium $309
• Large $379
• Lights (picking crabs) $120

Yikes.

 

*I know that's a cheap joke, but I bet John laughed.

 

Call for papers: AERE @ the Southern Economic Association Annual Meetings

The Southern Economic Association Annual Meetings will be held November 18-20, 2018 in Washington, D.C.: https://www.southerneconomic.org/conference/

Submit your abstract for presentation in an AERE session at the 2018 SEA here: http://www.mymeetingsavvy.com/aere-sea/login.aspx

You will be asked to enter relevant author information and upload a pdf document with your paper's title, author names and an abstract of no more than 1,000 words. Authors may submit more than one abstract.

Abstracts are due March 15. Authors will be notified of paper acceptance by March 30. A draft AERE program will be available on April 15 when sessions are due to the SEA.

Please note that:

1. The presentation of research in AERE-sponsored sessions is a benefit AERE provides expressly for its members. Although membership is not required to submit an abstract for consideration, if your paper is accepted, you will be required to join AERE, or renew your membership, in order to be placed on the draft program on April 15.
2. Presenters are required by the SEA to register for the SEA meetings.

Daily Demand and Supply: Sacre Bleu!*

What happens when the people of China decide that butter is yummy?

A sharp increase in global demand has caused the wholesale price of butter to nearly double in Europe. Consumers are paying more too: retail prices jumped nearly 20% in June over the previous year, according to data from Euromonitor.

Federation des Entrepreneurs de la Boulangerie, an industry group that represents French bakers, has described the situation as a "major crisis." It is warning of a sharp increase in the price of croissants, tarts and brioches.

"The price of butter, while certainly volatile, has never reached such a level before," the group said in a statement. "Butter shortages appear to be a real threat by the end of the year."

I'm not a butter policy expert, but I wonder whether this is the correct use of 'shortage?' A shortage occurs when the quantity demanded exceeds the quantity supplied persistently because prices can't rise to alleviate the shortage--usually due to some price policy that prevents prices from rising.  But it appears that butter prices in Europe are rising, so what is being classified as a potential shortage might just be an uncomfortable reality that prices are going to keep rising to prevent a shortage.

 

So why are butter prices rising?

Global butter consumption is rebounding after years of declines, when consumers ditched butter for margarine and other substitutes.

Raphael Moreau, food analyst at Euromonitor, said that consumers are increasingly opting for ingredients seen as natural and less processed, including butter.

The average European ate 8.4 pounds of butter in 2015, the most recent year available, compared to 7.9 pounds in 2010. The average American consumed 5.6 pounds of butter in 2015, up from 4.9 pounds in 2010, according to the U.S. Department of Agriculture (USDA).

At the same time, Chinese demand for foreign milk products is booming. The USDA predicts that Chinese milk imports are expected to jump by 38% this year, with almost all of it coming from the EU and New Zealand.

USDA predicts that global butter consumption will grow an additional 3% this year.

Demand increases cause price increases.

 

And here's some more on the potential shortage:

The next worry is a shortage of butter in Europe.

Butter production slumped 5% in the year to May 2017. Meanwhile, butter stockpiles have plunged 98% in a year, according to the European Commission's Milk Observatory.

"While supplies remain tight and demand has increased, there has been a shortage of butter in the EU, causing prices to soar...

So far no 'shortage,' just market adjustments.

...as buyers try to lock into contracts to obtain stocks," said Michael Liberty, dairy market analyst at Mintec.

Unfulfilled futures contracts might be called a 'shortage.' 

Peder Tuborgh, CEO of U.K. dairy giant Arla, warned the BBC last month that there might not be enough milk and cream to go around at Christmas.

There will be plenty to go around if prices are high enough.

 

*Urban Dictionary: "sacré bleu: A stereotypical french curse that is actually never used by real french people."

I'm not a real french person.

Daily Demand and Supply: Calculating an elasticity of demand for sugary drinks

From FiveThirtyEight.com:

Philadelphia supermarkets and distributors say beverage sales have dropped 30 percent to 50 percent after the city instituted a 1.5-cent-per-ounce tax on sugary and diet drinks. On one hand, these are the same people who want to get the tax repealed, and we don’t have hard numbers yet, so take this with a grain of salt. On the other hand, the whole point of the tax is to reduce consumption of stuff that will kill you anyway, so … good job?

To measure the responsiveness of consumers to price changes, economist use what is called the 'price elasticity of demand.' In simple terms, the price elasticity of demand tells us whether consumers react a little or a lot when the price of a good changes.  

In technical terms, the price elasticity of demand is equal to the percentage change in the quantity demanded divided by the percentage change in the price.  Because of the law of demand we know that the quantity demanded and the price will move in opposite directions, so the elasticity demand is a negative number.  To confuse everyone, we report the price elasticity of demand as a positive number (the absolute value).  

If the price elasticity of demand is greater than 1, then we say that demand is elastic and that means that consumers are pretty sensitive to price changes. 

If the price elasticity of demand in greater than one, then we say that demand in unit elastic (the percentage change in the quantity demanded is exactly equal to the percentage change in the price).

If the price elasticity of demand is less than one, then demand is price inelastic and that means that consumers are not very sensitive to price changes.  

One reason we care about the price elasticity of demand is because there is a relationship between price elasticities and revenues collected.  If demand is inelastic, an increase in the price will increase revenues.  If demand is elastic, a similar percentage increase in the price will decrease revenues.  The reverse is also true.

This is why we see goods with elastic demand (furniture, groceries, clothing) going on sale more than goods with inelastic demand (gas, liquor).

So what does this mean for the sugary drink example above?

Let's look at the numbers (and make some assumptions).  The tax imposed on sugary drinks is $0.015 per ounce.  For a 12 ounce soda (pop?) that's an increase in the price of $0.18.  To make the math easy let's say a 12 ounce soda costs $0.50 ($3.00 a six pack?) before the tax.  An $0.18 increase in the price is a 36% increase in the price.  That's pretty big.

How much does the quantity demanded react.  If grocery stores are to be believed, the quantity demanded fell between 30% and 50% in reaction to the tax increase.  That means the elasticity of demand is between 0.83 (30/36) and 1.39 (50/36).  

So it looks like demand is slightly inelastic to elastic.

Now we can ask question like:  

• If the goal is to raise tax revenues, will an increase in the tax increase, or decrease tax revenues?
  • Tax revenues will increase if demand is inelastic and decrease if demand is elastic.
• If the goal is to decrease sugar consumption, how effective will an increase in the sugar tax be?
  • It looks like consumers might be price sensitive, so an increase in the tax might be pretty effective at reducing sugary drink consumption