Ethanol: An Imminent Threat to Humanity

Ethanol: An Imminent Threat to Humanity

Postby Oscar » Wed Dec 24, 2008 1:45 pm

Ethanol: An Imminent Threat to Humanity

By George Tesseris December 2008

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Many countries have implemented policies to encourage the replacement of conventional fuel with ethanol and other bio-fuels typically made from corn or other grains. The International Energy Agency estimates that it would take 15% - 20% of the world's farmland to achieve a minimum content requirement of 5% ethanol in motor fuel if that standard was implemented worldwide. Canada's mandate is five percent, some countries are mandating more.

With today's level of agricultural productivity, 15% of the world's farmland feeds about one billion of its people. For every percentage point of the world's farmland that we choose to divert to fuel crops, food for 65 million people will disappear.

See the problem?

When I first took an interest in ethanol and the food crisis in the fall of 2008, the issue was on hardly anyone's radar. In just a few short months, it became a headline grabbing global crisis. How did it happen so quickly? I'm not an economist but I have taken a few university level economics courses, and I think basic economic theory can help us understand how the food crisis arose and where it is heading.

For some time now, demand for food grains has been exceeding supply. Not even the ethanol lobby denies that the ethanol boom is at least partly responsible for the supply/demand imbalance. The effect of this imbalance is that global grain stockpiles have hit historic lows. Where the world usually has six months' supply of food grains, last spring saw supply drop to less than two months' worth. Economic theory tells us that no commodity is more sensitive to the forces of supply and demand than food. In fact, when there's a concern that supply will not meet demand, the economics of food become the economics of scarcity. Panic buying, hoarding and very large price gyrations occur. Intuitively, this phenomenon is easy to understand.

Theoretically, it can be explained with the Economics 101 concepts of elasticity of demand and substitution. First, in economic terms, demand for food is almost completely inelastic. It stays almost constant in the face of supply drops or price increases because people can't put off the decision to eat until the economics become more favourable. Secondly, the prices of basic staples like wheat, corn, rice, and soybeans are interrelated because one can substitute for another in basic diets. In economic terms, they are substitute goods. Hence, even a small deficit in the supply/demand balance for corn can cause shortages and price spikes not only for corn but for all basic staples, as people start shifting their diets in search of affordable alternatives.

Essentially, what all of this means is that panic behaviour sets in quickly when people perceive they may lose access to affordable food. Left to market forces, fear translates into a price spiral that starts with basic staples and spreads to all other types of food. Eventually, of course, inflationary pressures ripple into the broader economy. That's what we started to see last spring. Supply could not keep up with demand, the cupboards became increasingly bare, and there was a run up in food prices. Of course, the world's poorest economies were most affected because their people have the least capacity to absorb increased costs. The result was perfectly predictable: widespread food demonstrations and riots, panic buying and hoarding, and export restrictions in some countries (in other words, hoarding on a national scale).

The key point to remember is that it doesn't take long before a very small ongoing deficit in the supply/demand equilibrium causes food shortages and very large price spikes. That, and that people get incredibly cranky when their grocery bill triples. Not a good idea to mess around with the world's food supply.

Let's be perfectly clear. This isn't the market breaking down. It's the market behaving exactly as science predicts. One thing is certain: when you take food production out of the system, you'd better be damn sure you can replace 100% of it with new supply or else there will be bidding wars for what remains and someone down the line will have to go without. Now about ethanol. Mandated ethanol use is climbing rapidly - and pressuring the food supply - all over the developed world. For example, twenty percent of the American corn crop is already going to ethanol and the recently-enacted U.S. Energy Bill mandates a five-fold increase in ethanol production over the next several years. The U.S. is the world's largest producer and exporter of corn. When it diverts so much of its corn crop for fuel, there is a very material impact on the fundamentals of supply and demand for all food grains worldwide.

Full text:

I think stopping ethanol is an extraordinarily important thing to do and I'm doing everything I can to make a difference.

Make a difference. Use your power. Tell Ottawa what you think. | |
Last edited by Oscar on Wed Dec 24, 2008 1:51 pm, edited 1 time in total.
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Larsen: Comment - Dec. 23.08

Postby Oscar » Wed Dec 24, 2008 1:49 pm

Sent: Tuesday, December 23, 2008 1:01 PM
Subject: RE:Ethanol: An Imminent Threat to Humanity

There are a few things I had trouble with in his article. The first is his statement that economics is a science. This is nonsense. Aside from some very basic economic laws, like the law of diminishing returns, most of what passes for economics is really just theoretical constructs based on a few basic economic laws; more an apology for a defective capitalist system than anything else. Both Adam Smith and David Ricardo (who set Smith's concepts to arithmetic) spent most of their time describing just how defective this system is. In the real world that system has completely failed to deliver the goods for the vast majority of the world's population.

Second: the rising prices for food are a function of the stranglehold of the oligopolies that control food processing and retailing.

Third: there is no shortage of either raw food or good food producing land on the planet. The UN's FAO estimates that around 35% of food produced is wasted between the field and the consumer. The number is about the same for our so-called advanced North American and European systems.

Fourth: the use of food as a geo-political weapon by the US and the EU. This is the elephant in the room few want to mention. USDA export subsidies since the 1960's have bankrupted and driven into the cities the majority of the world's farmers. In consequence much if not most, of the good food producing land in the world is devoted to so called cash crops, like cut flowers from Africa for the European table market. Mexico is now importing US corn while their own farmers move to the cities. Canadian farmers are now less than 2% of the population and the "problem" of too many farmers is still top of mind with the Ag departments in Ottawa, Saskatchewan and Alberta.

So while it is morally repugnant that North Americans would sooner burn food in their SUV's than help starving people in the third world, I see the idea of diverting food from North America into the third world as one of the root causes of hunger. When you bankrupt farmers in the third world it is no surprise that there are food shortages. Add in corrupt local regimes that wage proxy wars for our friends in Washington, Moscow and Beijing and it is amazing more people are not starving. If we really want to help people who are starving, we should send them money so they can buy food locally. This is not a quick fix, but it might help to re-develop local food producing capacity.

So my conclusion is that bio-fuels, aside from being an environmentally and economically stupid subsidy to huge processors, are really a side-show compared to the bigger issues I have outlined here. Consequently, bio-fuels policy will have little effect on "restoring market equilibrium" because, since at least the industrial revolution, there has never really been a market for food on this planet. It has always been managed and regulated by the various great powers I have alluded to. The writer, I think, is really asking for justice and fairness in food distribution. However, there is no "market solution" that will produce such a desirable outcome. We have to demand it, but we need to be very careful what we are demanding and how we expect to get there.

As an aside, Canada's export farmers have only ever marketed their grain, largely through the Canadian Wheat Board, to the middle and upper classes of the world, so our hands are at least relatively clean when it comes to using food as a weapon. But hey, give Harper some more time and this will change.

Ken Larsen
Red Deer. AB
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Harmon: Comment - Ethanol: An Imminent Threat to Humanity

Postby Oscar » Tue Dec 30, 2008 5:10 pm

December 21, 2008 4:01 PM
Subject: Re: Ethanol: An Imminent Threat to Humanity

Unfortunately, George is 10 years late and his market ideology has him on the wrong track.

Before the big boom in ethanol production the carry over of grains were at record lows with absolutely no response in prices from his 'markets.' The supply / demand pricing failed again for the farmer as it always has. Why would Cargill pay any more than they have to no matter how little there is. If he is in economics he should know the 4/40 rule that says that if 4 companies control 40% of the market they do not have to fix the prices as what one does the other follows (re gas prices.) That goes for buying food (which the market has benignly labeled 'commodities')

Since there are 5 world corporations who handle 85% of the world grain it is worse than the 4/40 rule. As we have seen in the courts, they have often been convicted of price fixing. I am not a conspiracy nut, it is the way business is done and we need to understand this.

The developed countries are not interested in feeding the starving people just as they are not interested in getting rid of poverty in their own countries. Starting in the late 1950's by the USA, food began being used as a weapon. In fact over the last 30 years, the developed countries used
the World Bank and IMF to force poor countries into austerity programs which caused them to go from being self sufficient in food to being food importers, thus more poverty! The markets and traders love it as they get to a cut of the extra trade.

George should have stayed with engineering as then maybe he would have been aware of more of the facts and done more serious thinking and reading on the issue. There have been many people who have raised the issue of food instead of ethanol for years. And he just discovered it this fall? It must be an error but still he is way behind the curve.

The big problem with using grain for ethanol is that it is a waste of good food and energy- that is, it has a negative energy balance. It would not be produced if it was not for the massive subsidies. The claims about being more environmentally friendly is bogus also- just as much CO2 and way more VOCs.

The bloom has long gone off ethanol as there are more scientists condemning it. Besides it was PR firms and scientists in a conflict of interest who promoted it anyway.

And of course the stupid politicians saw it as 'growing the economy' and had no interest in looking at the issue objectively.

Does the end justify the means? Will more people want the shut down of ethanol because of his argument? Will George study the issue to learn more? Does anyone in the financial service industry understand how they helped the current melt down? I will not hold my breath!

I believe one should do things for the right reasons.

Paul Harmon
Consul, SK
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