Fuel, Commodity, Farms, Subsidy, and World Hunger

04/25/2008

Paul Munnis


Legislators in Minnesota are coping with an assertion that converting food to alternative energy is causing world famine. There is a pause by all to examine this premise and to see if it is true or not.

Rep. Tina Liebling from Rochester makes the point that we do not want unintended consequences from decisions made during these difficult hours of managing the energy crisis. She is correct we do not want to make a colossal blunder.

Making it even worse the various oil interests are promoting a myth that world famine is caused by converting surplus food to energy here in the U.S.

The specific issue is over introducing a new diesel blend standard of bio-fuels with diesel oil for trucking use in the form of a 20% bio-fuel blend. But the heart of the argument is that food for energy use is displacing food for world consumption.

There are a lot of factors involved here but the key one in my thinking is that food is a commodity and commodity prices are rising because of a shrinking dollar and also because of commodity speculation. It is made worse by the forces supporting “globalization” who are demanding an end to farm subsidies.

I think that many of the problems that we witness are caused by a chain reaction of events that stem from spending $14 Billion dollars a month on war. That causes our deficit to rise. That lowers the value of our dollar. That causes inflation. When America gets inflation we export it. That export is forcing up food prices and fueling commodity speculation. The result is an increase in world hunger. But that's not the whole story.

We overproduce food and now we are converting surplus grains to fuel. But that isn’t a bad thing for when food was overproduced it was left to just rot. We have the best fed rats in the world here in America. Converting food to fuel is putting our rats onto a diet.

Back when we had tons of spare food it was left to rot in spite of the fact that many hungry mouths existed in the world. Two problems causes that: first, as The Economist, has repeatedly pointed out “if you give food away for free you destroy the recipient nations’ economy and inhibit their local farming efforts.” Secondly, the costs for distributing food internationally are far higher than the cost of letting it go to waste.

It is mainly private charity that pays for the cost of distribution of surplus foods -- businesses cannot justify shipping food at a loss. That means that food overproduction is not the answer to feeding our world hungry. Some would argue that it provides incentives to grow more food both for feeding the hungry at home and for energy use at home.

Most food is shipped as raw products, like grain, corn, rice, potatoes, and other basic food products that are then refined either in the home or by a manufacturer of finished products such as cereals or packaged foods. That commercial conversion creates jobs and grows an economy but it takes added fuel to do the conversion and to do the packaging. That is what emerging nations and soon all of us will lack – added fuel.

If we convert food to fuel it should eventually result in lower farming costs in due time here in America. That is also true for much of South America for example Brazil is turning their surplus land into growing sugar cane to produce ethanol and their economy is thriving as a result. In every nation that is weaning itself from mid-east oil the economy is thriving. We must make the transition too and we are -- consider the rush to buy fuel efficient cars here in the U.S. It costs $43 to tank up a Toyota Prius and $115 to tank up an SUV. Soon the cost of rising natural gas will have us putting solar panels on our roofs and wind turbines in our back yards. Thus economics is providing better legislator of fuel conservation than what lawmakers can do.

As we transition from oil to alterative energy it will be awhile before economy of scale kicks in. We will just have to live with it for oil is coming to the end of its economic life anyway and we have passed the mid-point of the known world energy supply and rising oil prices are inevitable and are a key factor driving up the cost of food production and that is causing more inflation and higher food prices.

We can only expect to see oil prices rise and when they stop rising then we will have reached energy equilibrium as measured in dollar terms. Once we reach equilibrium then new forms of alternative energy will only bring the cost of alternative energy down even as oil prices still climb. Every time that oil prices rise then alternative energy becomes the cheaper choice. We can see this right now in the cost of refined gasoline and that is why we are advocates for blending ethanol with gasoline, we want to stretch the supply. We know this equation well and it is what is motivating alternative energy to be harnessed in the first place.

Food prices are rising here in the US and that is to be expected as farm subsidies are reduced by the forces that support “globalization.” This Dohar round of world trade is all about ending food subsidies by rich nations.

The Doha Development Round commenced at Doha, Qatar in November 2001 and is still continuing. Its objective is to lower trade barriers around the world, permitting free trade between countries of varying prosperity. As of 2008, talks have stalled over a divide between the developed nations led by the European Union, the United States and Japan and the major developing countries (represented by the G20 developing nations), led and represented mainly by India, Brazil, China and South Africa. The problem is over the elimination of food and farm subsidies that lead to lower prices of food in developed nations.

Bush has pledged the U.S. to eliminate our farm subsidies and so he is delivering. He has the U.S. farm Bill tied up in knots over farm subsidies right now.

Farmers are responding by shifting the elimination of the subsidy over to the sale of corn for ethanol and soybeans for bio-diesel fuel using fallow or idle land for growing. You will recall the complaints of farmers being paid to not grow food; well they have shifted to growing energy crops instead and the rising cost of oil merely expedites the trend.

As AlterNet.com says in their article there are other factors too including obvious causes, such as increased demand from China and India, whose economies are booming. Rising fuel and fertilizer costs, increased use of bio-fuels and climate change have all played a part.

But less obvious causes have also had a profound effect on food prices.

Over the last few decades, the United States, the World Bank and the International Monetary Fund have used their leverage to impose devastating policies on developing countries. By requiring countries to open up their agriculture market to giant multinational companies, by insisting that countries dismantle their marketing boards and by persuading them to specialize in exportable cash crops such as coffee, cocoa, cotton and even flowers, they have driven the poorest countries into a downward spiral.

In the last thirty years, developing countries that used to be self-sufficient in food have turned into large food importers. Dismantling of marketing boards that kept commodities in a rolling stock to be released in event of a bad harvest, thus protecting both producers and consumers against sharp rises or drops in prices, has further worsened the situation.

Bush portrays farm subsidies as welfare for millionaire farmers and he doesn’t discuss its role in lowering food costs for consumers. We have published many articles on this subject in the past. France and Germany are having trouble too as they must end the subsidies to wine and cheese production that is forcing their exchange rates to drop at home and export prices to rise. So it is with every nation that provides a food subsidy. This is an inflationary round of trade rebalancing that is inherent in “globalization” and it is a major factor in the increase of world food prices.

As surplus acreage and crop production is converted to displace imported oil we gain in the cost of energy production. Food prices are rising around the world because a shrinking dollar forces the prices up. We know how much: it is -- 62 cents right now-- as measured by the spread in the dollar versus the Euro exchange rate. Check the cost of oil -- it is up 62% from the $65 per barrel bench-mark price. Check the falling dollar -- it is down 62% since the Euro and the dollar were at parity and which was at the same time that oil was $65 per barrel. There is a direct relationship.

There are several factors to be balanced. A good mathematician can write the equation and create a food/energy model that puts these factors in proper relationship. Speculators are doing exactly that and making a fortune as a result. We should ask the U of M to create such a food/energy model so that we can write legislation that immunizes us from creating unintended consequences for energy legislation. I would rather see us legislating on a quantum basis rather than using a less disciplined approach.

Some see the U.S. economy in a mess and as a result they are in despair. Other see our economy as reverberating to various cause and effect influences. I belong to the cause and effect school of thought. I think that the more quantitative we can be in moving towards change the better that we can understand and influence our social evolution. Indeed if we are to adapt and survive then we must have such an understanding for without it we are just on a fishing expedition.

Meanwhile, we Americans might consider putting in a family vegetable garden this year and perhaps raising rabbits or chickens in the backyard, maybe buying a book on home canning and preserving too. One can do container gardening on the back deck. These are practical ways to fight inflation. Urbanites might enjoy trips to the farmers market to buy in bulk in season and even consider getting a produce patch in the community food gardens. Rooftop gardens may also come back into fashion. We will all be cutting back on gasoline and so a lot of vacations will be ditched and spare time spent gardening and canning will really pay off.