According to the The Guardian, a [formerly] secret study completed by the World Bank has concluded biofuels are responsible for \75 percent of the recent run-up in world food prices. [A yet-to-be-released British Study reportedly came to the same conclusion, contradicting a U.S. government study concluding that food-for-fuel accounted for just two to three percent of that increase,] According to the British newspaper, the World Bank withheld the study to avoid embarrassing President Bush and the U.S. Government at next week's [non-Pontiac] G8 summit, at which Uncle Sam has full veto powers (sort of like Ford Motor Company and the few fortunate recipients of Crazy Henry's genes.) Leaders at the summit will be under pressure to cut back their biofuels mandates to avoid worsening the ongoing food shortage, which has been called "the first real economic crisis of globalization." The truth will out?
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Wheat and rice have also been skyrocketing in price, and nobody is making fuel out of those. Peanuts have more than doubled in price, while barley has more than tripled.
(I’m waiting for someone to come on to post about Peak Peanut Butter and Peak Barley. Our days of beer swilling are over, I guess.)
Commodity markets have been generally been displaying signs of investor madness. It’s the culmination of the China Premium and War Premium — speculators are betting that increased demand from Asia, the political uncertainty created by the Iraq war, and the cost of the tumbling US dollar make these good short-term investments. The fact that people in the third world can’t eat and people in the first world can’t drive because of it doesn’t cause them to shed many tears.
This stuff will break if the war ends, if/when the dollar rebounds (which it would if the war were to end) and when interest rates increase. A global recession will reduce the pressure added by the Asian component. The war premium and the falling dollar that runs with it is in US hands, we’ll see what the US chooses to do.
This president of OPEC has come out with the claim that ethanol is responsible for 40% of the rise in crude oil prices too.
To all those who believe the anti ethanol propaganda: I have some desert land in Arizona I would like to sell.
Pch101
It’s good to be a skeptic – it’s always useful to examine both sides (or more) of an argument.
If you read the article, you will find that quite some effort’s been put into analyzing the increases in food prices.
One reason that wheat and rice are increasing is the fact that land that would have been used for wheat in particular is now being used to grow “fuel” — and that workers who would otherwise be employed on rice fields are being lured by better pay clearing forests for – you guessed it – growing fuel.
China premium. War premium. Investor madness. Falling dollar. It could be worth it to examine both sides of that equation … the peanut butter peak was over my head, I’m afraid.
Corn demand does effect supply of alternative crops as farmers make a choice each season what to grow. Sorting out what causes what is in the end impossible, but just because wheat and rice are not being burned for fuel does not mean that the burning of corn for fuel has no effect upon the price of other crops.
I know that there is a contingent that intrinsically dislikes biofuels, but regardless of what one may hope for, production of these crops has been adequate. Corn production has been climbing, there is no corn shortage, either.
The aspect of biofuels that is distorting the markets are the tax incentives and legal mandates that impose market drivers that wouldn’t be there, which are added to the system in a drastic fashion. But most of the impact is on how those in the market bet on the programs, not on the actual crop production. Anything with “alt energy” in the title is all the rage on the markets.
I think that we all need to step back and realize that these last few years have been a very unusual time for financial markets in general. I believe that the dot.bomb, mortgage bubble and yet-to-be-burst commodities bubble are symptomatic of a much broader problem — the mechanisms in our markets that were meant to reduce market volatility are breaking down.
Not long ago, national governments were able to use agencies and regulations to reduce market spikes within their own economies. As the financial markets have become more global, this is no longer the case. These financial institutions have become more powerful than government, and they take advantage of anything that provides opportunities for leverage.
It is possible to control contracts of oil, corn and what not with very little money, just as it was possible to control real estate with relatively little money. The ability to magnify returns overshadows the fact that leverage also magnifies losses for those who are chasing profits.
When this bubble bursts, the logical question to ask is what industry will be the next to be exploited. You can bet that whatever it is, it will be at the public’s expense.
Interesting, Psc101. I agree that the financial market is spinning inside its own abstract set of rules — it’s quite astonishing, really. Any one set of financial data can be used to justify the price of something remaining fixed, falling or rising. With no change to the data – all that changes is what a financial actor would like to see happen.
And that’s not very sound.
My issue with ethanol is that it’s much ado about nothing. Spending an amount of energy to create the same amount of energy is idiocy.
(sigh) IMHO all of these studies trying to determine how to allocate the portion of price increases due to biofuel or any other specific thing are not worth the paper they’re typed on. The World Bank study is worthless (which is the real reason it hasn’t been released, must be an adult employed there somewhere) and the forthcoming British study will be worthless. The problem is just too damned complex, there are too many variables and interactions. Any model these pukes try to operate on is nothing but a jumble of coincidental correlations and wild-ass guesses.
The prices of lots of things have gone up in the past 5 years. Are we making Ethanol out of gold? Out of Euros? There’s a million influences and a million-factorial combinations of influences.
Of course this ALSO implies that a handful of politicians shouldn’t have foolishly picked a solution and promoted corn-ethanol with multiple layers of subsidies.
Credit bubbles used to be prevented/deflated via central banks raising interest rates. Now, the money involved from securitised debt and derivatives is MANY times the money floating around from banks and is seemingly disconnected from central bank influence via rates. Something will break this pattern, but it’ll apparently be ‘unplanned’ and the consequences unpredictable.
The first sentence of the linked article states “Biofuels have forced global food prices up by 75%.” However, your headline on TTAC proclaims something entirely different: that 75% of the [unstated] increase is attributable to E85.
Also, I believe that the U.S. government survey was for retail U.S. food prices only, which is a completely different can of worms box of cereal than the situation in 3rd-world nations. While the other linked article does state that the U.S. government survey was for global food, I think that is not the situation. For example, here in the U.S. a typical box of corn flakes has indeed risen 50% or 75% in the last 2 years. However, looking at price of the corn content alone, the price of a box of corn flakes has only gone from $0.05 to $0.09–about a 2% or 3% rise of the total $4 cost. The vast majority of the price increase was from other factors. In the 3rd-world, the price of the raw material (corn) is probably a much larger factor… maybe even 75%.
SunnyvaleCA:
The first sentence of the linked article states “Biofuels have forced global food prices up by 75%.” However, your headline on TTAC proclaims something entirely different: that 75% of the [unstated] increase is attributable to E85.
My bad. Headline amended.
I think that Sunnyvale might have been pointing to the fact that the term “biofuels” means more than just E85. It also means biodiesel, which is growing in parts of the world not named the US at an alarming rate as well. Indonesia is clearing land for palm oil at a rate that quite possibly matches reported clearing in Brazil in years past.
It’s not just an E85 thing.
Petrophiles can’t bear the possiblity that biofuels will progress to the point where they will beging to replace their beloved way of life.
But the technology and infrastruture for biofuels is in development. Today fuel is made from corn or flax seed, tomorrow, who knows? Algae? Hay?
What’s wrong? You don’t want to give this a chance? Everything has to work out of the box or it’s a crisis?
sigh, I was hoping we could help our farmers, reduce our dependence on foreign energy, and stop poisoning ourselves with high fructose corn syrup but it looks like corn biofuel isn’t the answer. Back to the research labs.
The problem is just too damned complex, there are too many variables and interactions. Any model these pukes try to operate on is nothing but a jumble of coincidental correlations and wild-ass guesses.
Considering these studies haven’t even been released yet, that’s a rather sweeping generalization. Just because something is complicated doesn’t mean it’s impenetrable. In fact, I think the run up in food prices should be very quantifiable.
Ethanol from corn is a heavily government subsidized boondoggle. A huge amount of the food crop is used with the help of billions of dollars of taxpayer subsidies to produce a tiny amount of fuel, much of which is burned for no benifit. And the ultimate slap in the face is the result that the same taxpayer then pays a huge increase in their food bill.
Of course the other result is the US government then spends millions more taxpayer dollars to cover up their stupidity.
Ayn Rand seems to have it right in ‘Atlas Shrugged’. Is there no common sense left in the country?
There is a huge lobby in the US working for the benefit of the mega agro corporations. Dent corn is an extremely reliable and productive crop, holding first place with soybeans for annual tonnage produced. Its production,however, is extremely industrialized and relatively inflexible. Growing crop for fuel production provides a very attractive stable market for the corn farming concerns. The goal is for their product to become an accepted essential component of auto fuel so that they are guaranteed predictable sales for each year’s crop. Corn sourced ethanol in fuel is NOT going to go away.
Ayn Rand – meh. She just repackaged Nietzsche for the American audience.
I don’t often use bumper stickers to voice my opinions, as most are not reducible to a short catchphrase. With biofuels, however, it’s easy. I’m really close to slapping a big “CORN IS FOR EATING” sign on the back of my Fit. As good as my gas mileage is, it would be better if not for this damnable E10.
Spending an amount of energy to create the same amount of energy is idiocy.
I don’t particularly think that corn-based ethanol is a stellar idea, but this statement is inaccurate.
Despite the hype, ethanol is energy positive. This statement can be debated if the focus is kept strictly on the fuel output, but is certainly true when the non-fuel byproducts of ethanol production (distillers grains) are accounted for.
What’s left over from producing ethanol becomes animal feed and a soil nutrient. If you didn’t feed those cattle with distillers grains, you’d have to feed them something else, probably some other corn that can now be fed to humans, instead.
Also, what has been missed in all of the panic about corn being allocated to ethanol is that US corn supplies have been escalating. There is more corn available for food consumption in the US than there was a few years ago, before the ethanol wave began.
Corn has been quite cheap for Americans. Its presence in every processed food imaginable in the form of high fructose corn syrup has been spurred on by it being cheap and subsidized.
There’s not only plenty of it to go around, but there’s probably too much of it in our diets, already. Corn syrup is being linked to obesity, something that the US has been producing in abundance. We should be eating less of it, not more of it.
I believe the anti ethanol propaganda in all its versions, from what it is doing to my car, truck and outboard motors to the effects at the cash register and the wetlands of the mid western states.
And “No”, I grew up in Texas and do not want to buy any desert land.
Crops are for eating and feeding.
Pch101: “the political uncertainty created by the Iraq war”
Surely you didn’t mean to suggest there was no political uncertainty in the Middle East before the “Iraq war.” (I use quotation marks because Iraq itself stopped being a player when Saddam’s regime collapsed.) The region was tumultuous long before 2003, or 1991, or 1979.
Or that there will be no more political uncertainty in the Middle East after the “Iraq war.” To be sure, a stable and non-hostile Iraq will help a lot, but most of the political uncertainty, as well as when warfare will end, is under Iran’s control.
Surely you didn’t mean to suggest there was no political uncertainty in the Middle East before the “Iraq war.”
There is a lot more uncertainty now than there was before. Particularly with the US being stuck in a quagmire in the heart of Big Oil Country.
The US’ superpower status is compromised by quagmires. Being a superpower means that the US is (1) a winner and (2) able to react to crises if and when they erupt on our planet.
At the moment, the US gives as much confidence as the cops do during the middle of a major riot. Everybody figures that the US policeman is pretty much impotent at the moment, in serious need of political Viagra.
The markets have lost faith in USA, Inc. accordingly. They have punished us for this by devaluing the dollar.
The dollar is ultimately an act of faith, and the tenuous political predicament created by the war and budgetary burdens that run with it have pushed down its value tremendously.
There have been two times in recent history that the US experienced a falling dollar and soaring commodity prices on this scale: the tail end of the Vietnam War and the Iran hostage crisis. This should seem awfully familiar, because it is.
The markets don’t like it when the US gets stuck in quagmires. Listen to the markets, they are trying to tell us something. Even if we don’t want to hear it.
If you want to keep paying $5/gal for gas, then keep ignoring the markets and keep supporting the war. If we’re going to lose big, we might as well make the Saudis rich in the process.
All I need to know is that E85 was going for $2.76/gal last week in my town, while gas was $4.09/gal.
Would I rather pay $94 to fill up my 23 gal tank or $63? You get one guess…
Every week there’s some study released regarding biofuels and food prices…the results remind me of a tennis match. IMO, surely SOME of the rise in food prices can be attributed to biofuels, but MOST of the rise is due to, yeah you guessed it, rising fuel prices!!
All I need to know is that E85 was going for $2.76/gal last week in my town, while gas was $4.09/gal.
That’s odd. Where I live the difference is about $3.63 E85 vs. $3.93 gasoline — which makes the E85 way too expensive for what you get.
In any case, what you’re seeing is not far from the “correct” mileage-adjusted price, and certainly not as good a deal as you may think, since you should be getting significantly worse mileage on the E85.
Its amazing that people didn’t see this coming sooner..hey I have a great idea, lets make all of our fuel out of FOOD?? Anyway none the less people are pressing ahead with stuff like this… http://www.thegreenmotorist.com/index.php/convert-your-vehicle-to-run-on-e85-for-400/
I just saw a shell offering e-85 here for $3.92. Gas at the same station I think was $4.14…
Not worth it.
Obviously it depends on where you live. Even here in South-Central Indiana, the price fluctuates up to $.20/gal from town to town.
The “significantly worse mileage” claim piqued my interest so I did some informal surveys of people driving flex-fuel vehicles at my local station (which offers E85) as well as a few neighbors who drive them.
One guy said he saw no difference whatsoever in his daily commute (Tahoe), another said he saw about 4 mpg less in his (Taurus). The other 3 people said the difference was about 1 mpg overall. Anecdotal, true, and who knows if anything else changed besides the fuel, but the differences in mpg were not as significant as I expected.
OK, it’s quite simple:
The ethanol mandate artificially drives up demand for corn (since that’s what many/most ethanol producers make fuel out of).
As demand goes up for corn, corn prices rise.
As corn prices rise, more farmers grow corn, since they can get more money per acre for corn than for whatever they used to grow.
More farmers choosing to grow corn means they are not planting other crops (or are planting less of them). This reduces the supply of those other crops.
Because demand for those other things has not fallen, but the supply has, prices for the other food crops rise. The supply-demand relationship works on both sides, remember.
Thus the ethanol mandate is responsible for most of the rise in food prices, even for the crops we don’t make fuel out of.
The weak dollar, speculation, etc. are probably also factors, but I put it to you that you could remove every other factor from the equation and see the same effect. Supply and demand is a very simple concept, so simple that many people refuse to recognize the truth contained within. Yes, the global economy is complicated, but the complications you see are mostly noise distracting you from the more basic economic drivers. By artificially mucking around with the demand for corn, the US and other governments have ended up sending prices for most food crops soaring. The “Law of Unintended Consequences” strikes again!
The supply and demand argument is quite compelling. Well, that is until you look at the underlying data.
Let’s take just one commodity for the sake of example: wheat. During the 2003-04 season, global production was 553.8 million metric tons. Consumption was 588.6 tons, actually exceeding supply. Remaining stocks were 132.1 tons.
Fast forward to 2007-8. Consumption increased 33.6 metric tons; supplies increased 57.0 metric tons. Remaining stocks ended up being the same as in 2003-4.
Now let’s look at the price. During 2003/4, when supply outstripped demand and had to be met by depleting stocks, the price varied between about $150-160/bushel. During 2007/8, when supply exceeded demand and stocks were being replenished, the prices moved into $400/bushel territory.
There is an absolute disconnect between supply and demand in this scenario. If anything, the price should have been substantially higher back in 2003 and should have fallen since, given that we clearly have enough inventories and new supplies to meet demand, and supply is exceeding demand. The supply and demand numbers for the commodity don’t correlate with the price of wheat.
Within the last decade, we’ve had two economic bubbles, one for technology stocks and another for real estate. Same situation as here, really — prices that defy gravity and don’t correlate with supply and demand.
To follow the problem requires getting beyond the basic first semester economics course and requires looking at the macro. What the latest bubbles have in common is that investors are looking for opportunities to dramatically increase their returns through either scale (tech) or low margin requirements (real estate, commodities.)
The ability to turn one dollar into twenty or more is highly attractive these days, and it creates distortion as it goes. The market is being increasingly driven by financial vehicles, rather than demand for underlying goods, as has traditionally been the case. As we can see, it makes a big difference.
Well put.
My father worked as an estate surveyor, and he told me ‘When the price for a house is more than the insurance company would pay to rebuild it if it burned to the ground, don’t buy – it’s a bubble.’
Works for more things than just houses.
“If you want to keep paying $5/gal for gas, then keep ignoring the markets and keep supporting the war.”
For some people, it seems that using our military to defend modernity is the all-purpose bugaboo. OK, suppose we say “We give up; the troops are coming home immediately.” Is there any reason to think that would bring the price of gas down noticeably? My answer: no. But it would likely encourage Iran to be more aggressive in efforts to establish Islamist hegemony over the Gulf, and that would have dire consequences for oil commerce.
Yeah, but if you were really serious about confronting militant Islamacism you’d be fighting in Saudi Arabia.
But you aren’t, so…
Is there any reason to think that would bring the price of gas down noticeably?
Yep. Because it gives the US an opportunity to reduce or eliminate its budget deficit, and assures the world that the US is once again available to address global crises as they arise.
Speculators are looking for opportunities to bet on potential supply constraints, and conflict raises the specter of supply constraints. A lot of the current price is about potential supply constraints, not actual constraints that exist today.
The key to a successful US withdrawal would involve making sure that Iraq doesn’t become a destabilizing force within the region that could attack its neighbors.
This is pretty much what Bush 41 was attempting to accomplish with the Kuwait War, and he did very well with it. The oil markets remained calm and stable for over a decade as a result.
The markets would welcome a containment policy; they don’t appreciate the US being tethered down to a budget busting quagmire that costs money that the US can’t afford and saps energy from a military too stretched to deal with anything else that may occur.
The US may have to just get it over with, partition Iraq, and make some effort that the Shiites don’t allow their area to become a western province of Iran. Fortunately for the US, no one else in the neighborhood wants Iran to get too much out of this, either.