Friday, May 30, 2008

Ethanol, Food Prices, and More Bullshit

Virginians love to BM&G about how the corn conspiracy and ethanol subsidies are driving up the price of a steak and driving down demand for other locally-produced commodities from beef to coal. I say let 'em - they're just flat wrong.

There's a new study out on the increased food prices we're seeing, as summarized by the NYTIMES (the official summary of the OECD/UN report can be accessed here). The overall impact of ethanol on food price increases seen recently is about 2-3%. So, that loaf of pound of hamburger that went up by about a quarter at the grocery store had about a penny to do with ethanol. Anyway, as it turns out the reason food prices are rising is not this complicated, general-equilibrium of energy, housing and ethanol, but one of simple supply and demand (mostly just demand) in the food market alone. Basically, the reason food prices are rising is because people around the world are busting out of poverty and can now afford higher quantities and quality of food (which, by the way, is a GOOD thing). See, most of the corn in the US goes to cattle feed. Therefore as people get richer and consume more protein, badda-bing! Higher corn prices, which leads to higher plantings of corn relative to non-feed grains (soybeans, wheat, etc.) and those prices rise accordingly.

If you're looking to goat the government for grain prices in the US, look first at sugar policy. Sugar policy affects corn prices much more than ethanol for one simple reason: After feed grain, the highest end-use of corn is high-fructose syrup. Understanding this requires a pretty high-tech econometric techinique: Drink a Coke (you COULD drink a Pepsi and reach the same empirical conclusion, but I wouldn't recommend it), then look at the label. Then, go to Europe, and repeat. The second ingredient on the US can (after H2O) is high fructose CORN syrup; on the European can it is SUGAR. Ever wonder about this? Everywhere else it's cheaper and to put sugar in as the main sweetner in most things, but here it's not because the in the 1930s the us put a quota on sugar imported to the US, mostly to keep CUBA friendly (see how well that worked???).

Now the Sugar quota has a second, indirect effect on prices. You see, sugar isn't just a better way to sweeten drinks, IT'S ALSO MORE EFFECTIVE FOR MAKING ETHANOL! To make ethanol you need to start with SUGAR! In the US, guess what the main ingredient used to make the sugar for ethanol is! CORN (NOT actual SUGAR)! Ever wonder why Brazil is making and using ethanol more efficiently and with fewer subsidies? BECAUSE THEY MAKE IT SMARTER THAN WE DO!

2 comments:

  1. Does the sugar lobby think this diabolically or is all this just a happy (for the sugar lobby) by product of utter greed and rational ignorance!

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  2. This is a tough question because the two issues (lobby groups and rational ignorance by voters) cannot be divorced theoretically. There are a number of political economy models in which part of the way in which lobby groups dominate the policy outcome is through the distribution of distorted information to imperfectly-informed voters or politicians. This is one of the channels through which "contributions" can be assumed to "work" in affecting policy with democratic institutions and without making more nefarious assumptions about the morals of those in or running for office.

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