The Ethanol Boom's Unintended Consequences

While the US government foolishly turns to ethanol as part of the solution to reduce our dependence on foreign oil, the rapidly rising cost of corn is having devastating unintended consequences: a shortage of tequila and pricey tortillas. You may want to stock up on supplies now for next year’s Cinco de Mayo party.

According to MSNBC:

The switch to corn will contribute to an expected scarcity of agave in coming years, with officials predicting that farmers will plant between 25 percent and 35 percent less agave this year to turn the land over to corn.

Seriously though, this is just one ripple affect on food prices. The demand for ethanol will undoubtedly lead to inflation across the entire food supply as acreage for other food supplies shrink and feed for animals skyrockets. How bad is it? It has become so expensive to feed livestock corn-based feed that one farmer is feeding his livestock cookies, licorice, cheese curls, candy bars, french fries, frosted wheat cereal and peanut-butter cups! Another farmer in Idaho is feeding them tater tots! See the entire article over at the Wall Street Journal. According to the National Chicken Council (via HPJ.com) “The price of corn has driven the cost of feeding chickens up 40 percent. Chicken is the most popular meat with consumers.”

Ethanol induced food inflation could potentially have a significant impact on the economy, and at worst be the catalyst for a global recession. If that weren’t enough, how about the destruction of our environment, which lasts a lifetime? In Southeast Asia, vast areas of tropical forest are being cleared and burned to plant oil palms destined for conversion to biodiesel. Soybeans and especially corn are row crops that contribute to soil erosion and water pollution and require large amounts of fertilizer, pesticides, and fuel to grow, harvest, and dry. They are the major cause of nitrogen runoff — the harmful leakage of nitrogen from fields when it rains — of the type that has created the so-called dead zone in the Gulf of Mexico, an ocean area the size of New Jersey that has so little oxygen it can barely support life (via ForeignAffairs.org). Well, at least someone is profiting from the destruction - just take a look at the charts of leading fertilizer producers Terra Nitrogen (TNH) and Potash (POT). It's a lose-lose situation for the environment.

Granted, to ease the pressure to produce corn, the administration is promoting such biofuels as cellulosic ethanol, which can be made from wood chips, switchgrass and corn-plant parts such as stalks and leaves. But the process of making ethanol from those sources still is still very much in its infancy and not very practical. Biofuels could be made efficiently from a variety of other sources, such as grasses and wood chips, if the government funded the necessary research and development. But in the United States, at least, corn and soybeans have been used as primary inputs for many years thanks in large part to the lobbying efforts of corn and soybean growers and Archer Daniels Midland Company (ADM), the biggest ethanol producer in the U.S. market. ADM owes much of its growth to political connections, especially to key legislators who can earmark special subsidies for its products. Vice President Hubert Humphrey advanced many such measures when he served as a senator from Minnesota. Senator Bob Dole [R-Kans.] advocated tirelessly for the company during his long career. As the conservative critic James Bovard noted over a decade ago, nearly half of ADM's profits have come from products that the U.S. government has either subsidized or protected. - ForeignAffairs.org

I highly recommend reading the entire article How Biofuels Could Starve the Poor. It really lays out the case against using ethanol (particularly corn based) and how government is protecting inefficient ways of producing ethanol to preserve corporate profits at the risk of the environment and the economy. But what the heck, right? After all, it would be political suicide to denounce the use of ethanol. Anything for a few votes.

On a final note, here’s a good piece 20/20 did on the myth of ethanol:

Comments

[huangjin:]

China just announced an end to new biofuel projects because of the impact on food prices.

2007 Jun 12 10:41 AM

[huangjin:]

China just announced an end to new biofuel projects because of the impact on food prices.

2007 Jun 12 10:41 AM

[UncleFred:]

BFRE and STKL hold patents on manufacture of ethanol from cellulosic sources, which would normally be waste products, and which are very plentiful. Use of sugar cane, as done by Brazil, yields a much higher ROEI (return on energy invested) than using corn or soybeans. Since the USA does not have the climate for producing large crops of sugar cane, production of cellulosic ethanol makes much more sense than using corn or soybeans, since using corn or soybeans drives up the cost of beef, poultry, etc., in addition to driving up the price of the commodities themselves.

2007 Jun 12 11:09 AM

[User 6666:]

Complete b*llsh*t. Farmers simply are not feeding their livestock that. They wouldn't eat most of that and couldn't digest it if they did. Tell me corn is more expensive than candy bars, right. First section turned me off - couldn't get past that. If he just feels free to make crap up ... forget it.

2007 Jun 12 03:11 PM

[LeeCarlson:]

I have to agree with Mr. Morris as I was raised on a farm and we never fed cattle any corn ! Silage in the winter, yes, but not corn !! Only the "feed lots" give cattle grains to fatten them up . In fact, having been to Australia and New zealand, they only eat grass fed beef which is far more tender and far less fattening, meaning far less cholesterol and saturated fats. In this country, it appears that the Gov. insists on having those ribbons of fat ,..meaninng cholesterol and saturated fats,..to make it into what they want to call "prime". Guess the Gov. is trying to kill us off with cholesterol,..
Just this past week when shopping , I picked up some fresh corn on the cob, and it was the same price as last year,..6 ears for a buck !
LC

2007 Jun 12 03:50 PM

[pkamp:]

The problem with ethanol driving up food prices is people with pulpits like Tate Dwinnell who don't know what they're talking about. It has nothing to do with supply and demand or planted acres. For every 800 bushels of corn that are traded bought or sold, 1 bushel is actually taken delivery of - meaning, the 799 others are speculators who, driven by fear, gut instinct, or jump-on-the-latest-pro... bandwagon, are controlling the price of ethanol far more than US farmers, polticians, or the big commodity meanie ADM. (By the way, it is the fuel blenders, i.e. oil and gas companies, who get most of the ethanol blending subsidy)

That's called capitalism. We could fix the price of corn at $2.30 or so, and it would be good for all the little people across Amerca buying fuel every day - but I dont' think we're going to propone regulated markets, right?

Asking the CATO Institute about the benefits of ethanol, or the reality of global warming, is akin to asking the tobacco institute about lung cancer. Is that the best 20/20 can do?

Listen again to all the politicians in the 20/20 report (except for Hilary, but listen closely to Evan Bayh). The reason they're behind it is that it is good for the US. Before politicians backed it, it was doing great things for rural areas across the midwest - revitalizing towns, creating new strong ag markets, burning cleaner, creating local jobs and local investment opportunities, and yes, reducing imports. Its now wonder all the poticians like it, but they are simply jumping on the bandwagon.

By the end of 2007, the amount of ethanol made in the US will approach gasoline made from oil imports from Iraq and Kuwait. And the oil companies will soon be shifting that production to the rapidly growing Chinese and Indian markets, because it will make more sense - they're buying lots of cars over in Asia.
So ethanol will never replace gasoline - but its a matter of doing the right things, one at a time, so that we can be more energy reliant. For now, corn makes perfectly good sense, and will always be cost and energy effective with all the good developments being made in the industry. The industry itself is closely following the use of corn and its impact on feed corn and export markets (both of which went up last year, in ethanol's biggest year ever!) and growth of ethanol production using other feedstocks. It's because our farmers and ethanol producers are good, smart, resourceful people and they are increasing the yields while lowering use of fertilizers and taking good measures on soil erosion.

At the current price, feeding cows whole corn costs about six cents a pound. So if "a farmer" wants to feed his livestock french fries, which would cost around eight dollars a pound, he's not too bright. What he should be doing is feeding his cows DDGS (a high protein byproduct of ethanol production), which when blended into animal feed, can lower feed cost per animal. This is the truth, and livestock producers with a little bit of vision are warmly embracing this.

Sounds like Tate Dwinnell might be pretty attached to his tequilla (I like it too!), but this article and the 20/20 piece are complete rubbish.

2007 Jun 13 02:54 PM

[markj:]

On balance, Mr. Dwinnell appears to be correct in his piece. And John Stossel is no slouch, either. Mr. Morris and others perhaps did not take the time to read the WSJ article that Dwinnell linked in his piece (worth seeking out if one isn't an electronic subscriber to WSJ) -- in fact, pigs (not cows) are increasingly being fed the smorgasbord of non-corn items, such as broken pieces of candy from manufacturers, tater tots, etc. (yes, the discard candy is cheaper than corn). Mr. Kamp has more confidence in USA politicians than I do; it's already easy to see many unintended consequences of the government ultrahype and subsidizing ethanol. The price of corn futures are real enough for farmers making decisions about what, and how much, to plant. Cheap, local sweet corn is incidental to the major economic reverberations caused by the ethanol hype. See what Jim Jubak recently said regarding ethanol's significant economic ripple effects at articles.moneycentral....

2007 Jun 14 11:02 AM

[dcappe10:]

Ethanol is truly a fascinating concept and alternative to our current dependence on fuels. But in respects to its Stock, don’t bet all your corn on this one. Here is an article that explains the implications of buying Ethanol Stock.

Why Ethanol Cannot Live Up to all the “Perfect” Energy-Solution Hype

Read up, Invest Strong, & Enjoy…..Cheers!

2007 Jun 15 04:19 PM