Bush has NOT cut taxes
By Mark BrandlyPosted on 4/30/2007 from ludwig von mises . com
While the occupation of Iraq is the major topic of debate in the 2008 presidential race, the candidates have also taken positions on George Bush's fiscal policies. We see Republican candidates supporting Bush's tax "cuts" and being asked to sign a pledge, a pledge they will all, except for Ron Paul, violate, promising not to raise taxes, while Democrats decry Bush's tax "cuts" and promise to at least consider rolling back the tax cuts should one of them take power.
In short, there is general agreement that Bush, and the Republican Party in general, is in favor of tax cuts. Let's consider the validity of this assumption. Do Bush's policies demonstrate that he's in favor of reducing taxes?
First, in order to consider how Bush's policies have affected tax burdens, I need to define the term "taxes." Taxes are a revenue source for the state and the state is the entity that has a monopoly, or at least claims the right to a monopoly, over the use of coercion within its political borders. Therefore, Hans Hoppe's explanation of taxation as "a coercive, non-contractual transfer of definite physical assets" (Economics and Ethics of Private Property, p. 28) provides us with a sound definition of taxation. Taxes are the takings of private property in order to fund the state. They are a form of aggression against private property.
We normally think of taxes as coercive non-contractual transfers that are based on the sale price of some exchange, such as excise taxes on the sale of goods or services, tariffs on imports, or income taxes on the sale of labor. Our federal government's largest revenue sources are due to taxing workers for showing up to work and earning incomes. In 2006, the federal government collected $1,044 billion and $838 billion, respectively, in income taxes and payroll taxes, which are a form of income taxes.
In addition to what we normally think of as taxes, the state also has the option of borrowing money by selling government securities in order to finance its spending. This is a significant form of finance as the federal debt, including intragovernmental debt, increased $574 billion in fiscal year 2006. Budget deficits are generally not considered to be a form of taxation and it's oftentimes useful to distinguish between revenues generated by taxing the sale of a good or service and revenues generated by selling securities. However, government debt is a coercive transfer of property from private hands to government coffers.
Those who lend the government money are purchasing a promise to take someone's property in the future in order to repay the loan. If the securities that are issued are to be repaid, then the state is simply shifting tax burdens away from current taxpayers on to future taxpayers. We should recognize that there is a current burden from government borrowing and that is the opportunity cost of the resources the state commands due to the revenues resulting from the sale of securities. However, we must also recognize that government securities are simply promises to take someone's property in the future and give it to the bondholder. This future aggression against private property is a tax. Deficit spending is simply another way of shifting tax burdens.
What about the case where the state incurs debt but later repudiates that debt? Suppose that the state borrows $100 from me with the promise to take $100 plus interest from someone in the future and use those funds to repay the debt. However, when the time comes, the state refuses to tax the future taxpayer and declares that the debt is repudiated. In this case, the state has taken $100 of my property as assuredly as if it had taken $100 from me in direct taxes. In fact, debt repudiation is another coercive non-contractual transfer of assets, in other words, it's a method of taxation.
There are also minor revenue options that we could consider. One method of generating revenues is for the state to sell its assets. The federal government owns a tremendous amount of property, including land. It owns 84.5% of the land in Nevada, 69.1% of the land in Alaska, and 57.5% of the land in Utah. The sale of Nevada could generate a significant amount of revenue. However, the federal government needed a revenue source when it originally acquired these assets. The government used tax revenues to purchase Alaska and the lands that are referred to as the Louisiana Purchase. If we trace the revenues generated through the sale of assets back to its original source we see that this is simply another form of taxation.
Suppose the state acquired the assets, say land, by laying claim to previously unowned resources? If the government claimed the right to own previously unowned property and then sold this property, would this be a case of government revenue that was not ultimately due to taxation? No. The state needs a form of revenue to enforce its claim on this property and to manage and maintain the property, and that revenue is generated by some form of taxation. Ultimately, the sale of assets involves a coercive transfer of physical assets.
"Those who lend the government money are purchasing a promise to take someone's property in the future in order to repay the loan."
Given the promises made before the war on and occupation of Iraq, promises that revenues from Iraqi oil sales would fund US spending on the war, we might consider the conquest and occupation of other countries as a form of public finance. But this is also a form of taxation. Instead of taxing domestic targets, the government is simply taxing the populace of the conquered state.
If the US government claims the right to the funds from the sale of Iraqi oil, this is no different than the government demanding to be paid from the sale of oil revenues in Alaska. In addition, tax revenues are required to initially achieve the conquest. Taxpayers may, in some cases, be able to shift their tax burdens onto others when the state conquers new territories, but this is an example of tax shifting, not an instance of government finance that is separate from taxation.
Other than revenue options that have already been discussed, the state, at least at the national level, may also have the option of creating new money. The price inflation resulting from the increase in the money supply decreases the purchasing power of incomes and savings. Printing money is a hidden form of taxation. Look at it this way, the state can take $100 of a taxpayer's money by taxing his income or the state can create money and reduce the purchasing power of that taxpayer's monetary assets by $100. In either case, the taxpayer has had $100 taken from him. Price inflation is a coercive transfer of assets, and printing money, therefore, fits the definition of taxation.
In 2006, the federal government collected $30 billion in "earnings" from the Federal Reserve. According to the CPI, the 2006 inflation rate was 2.5%. Given that the money supply, defined as M3, is about $11 trillion in this country, inflation decreased the value of our monetary holdings roughly $260 billion. We were taxed $260 billion and this hidden tax only generated $30 billion of federal revenues over and above the cost of funding the inflationary agency itself. Not only is price inflation a form of taxation, it's an inefficient way to fund the state. Given the current goals of federal spending, expanding the empire and the domestic welfare state, maybe we should be thankful for inefficient methods of taxation. Maybe inefficiencies like this decrease the government's ability to expand its reach.
Since all forms of government revenue are generated by a coercive, non-contractual transfer of assets, it would be accurate to refer to all government spending as some form of taxation. Now, what can we say about Bush's tax-cutting reputation? Simply put, it's undeserved.
$28
Taxes are a form of aggression against private property.
Including the estimates for the 2007 budget, in the first six years of Bush's term in office, federal income tax revenues have increased 18% and payroll tax revenues have increased 26%, the money supply, defined as M3, increased 41% in just the first five years since Bush took office, and the federal debt has increased 52%, and is approaching $9 trillion, since the beginning of fiscal year 2002.
The most appropriate measure of the level of taxation is government spending. In seven years, from fiscal year 2001 to the proposed budget in fiscal year 2008, federal spending will increase from $1,863.2 billion to an estimated $2,901.9 billion, an increase of 55%. Actual spending in 2008 will probably top $3 trillion, so it's likely that federal spending will increase more than 60% in the first seven years of Bush's reign. The president has supported these spending increases and is pushing for even higher levels of spending.
Bush should not be credited with cutting our tax burdens. He has engaged in tax shifting and in hiding the burdens of his expansions of the welfare and warfare state, and he has demonstrated that he's opposed to lowering our tax burdens. Deep into his second term, we have plenty of evidence to show that Bush should be blamed for increasing our tax burdens at a phenomenal pace.
The Republican Party claims to be the party of limited government and economic freedom. Don't believe it. Republicans have shown that when they are in power they are even more fiscally irresponsible than their Democratic counterparts, and that takes some doing.
Monday, April 30, 2007
Friday, April 27, 2007
M3 is BACK
http://www.nowandfutures.com/key_stats.html Thanks ELva for finding this site.
M3 up 12% Bernanke is talking out of ALL sides of his slippery bearded mouth.
D
M3 up 12% Bernanke is talking out of ALL sides of his slippery bearded mouth.
D
GRIM REAPER
Not sure 2007 will be down year, but all bets are off after that. What will the market finally see down the road? A DEM victory and higher taxes? Hillary?
WEak GDP data out this AM growth at 1.5% !!!
Interest rates still historically low. FED meets this month, I am interested to see how the market reacts to their commentary. I expect to see them leave things status quo.
Housing market is in the shitter, crushing growth. SO how is it the stock market doesnt show any worry whatsoever?
There is a flood of money out there, it fled the housing market and is now flowing into the stock market. Imagine the GDP without recent stock market gains?
IF ANY rumblings from ASIAN markets, could be start of trouble.
There is NO credable candidate running for PResident IMHO. A NO win in IRAQ, the US is in danger of losing its status
D
WEak GDP data out this AM growth at 1.5% !!!
Interest rates still historically low. FED meets this month, I am interested to see how the market reacts to their commentary. I expect to see them leave things status quo.
Housing market is in the shitter, crushing growth. SO how is it the stock market doesnt show any worry whatsoever?
There is a flood of money out there, it fled the housing market and is now flowing into the stock market. Imagine the GDP without recent stock market gains?
IF ANY rumblings from ASIAN markets, could be start of trouble.
There is NO credable candidate running for PResident IMHO. A NO win in IRAQ, the US is in danger of losing its status
D
Thursday, April 26, 2007
WHY EXXON DOESN'T GIVE A HOOT ABOUT ALT FUELS
http://money.cnn.com/magazines/fortune/fortune_archive/2007/04/30/8405398/index.htm?postversion=2007042306
THEY ARE GOING WHERE THE PROFITS ARE!
Now to the markets: Looks like all isin synch, world markets making new highs, Dow new highs, SPX closing in on new all time high, Transport avg new highs, what is NOT to like?
A US base that has LOST over 3 million manufactruing jobs since 2003, a US that has a negative savings rate from which to borrow for capital investment, and one which is beholding to Japan and CHina to subsidize a Trillion $$ a year debt habbit. We are to assume this can go on indefinately?
The FED has been buying ever increasing amounts of the funny paper being issued, at some point an accident could occur which blows the top off interest rates. I believe the areas to watch for trouble is a 10 year rising above 5% and a sudden rise in unemployment that is sustained.
My sources tell me there is continuing trouble in the real estate sector, with near record inventory of homes to sell and more coming on line, we still have not had the pressure on prices in general one would think would occur, except in ares like MIami condos. SUBPRIME WOES have hurt big time resulting in plunging profits for most mortgage companies. Credit standards are rising making it harder for some to get loans.
BUT, without a real estate sector to attract funds away from the stock markets, I find it hard to predict an end to this bull market cycle. Our debtors and the US are tied to the hip in mutual need.
AMAZON jumps over 20% on better than expected earnings, the bubble has returned. EBAY reports tonight, it is my guess should they excite and raise guidance, possible repeat on their share price.
80% plus upside volume yesterday, until some 80% plus downside volume arrives, trend is firmly UP intermediate term. IMHO
Call me stubborn, I do not feel it PRUDENT to put NEW MONIES into the US stock market at these levels.
Calling A TOP is not an easy business, the usual signs of one are not currently present, though a correction could occur at any time.
D
THEY ARE GOING WHERE THE PROFITS ARE!
Now to the markets: Looks like all isin synch, world markets making new highs, Dow new highs, SPX closing in on new all time high, Transport avg new highs, what is NOT to like?
A US base that has LOST over 3 million manufactruing jobs since 2003, a US that has a negative savings rate from which to borrow for capital investment, and one which is beholding to Japan and CHina to subsidize a Trillion $$ a year debt habbit. We are to assume this can go on indefinately?
The FED has been buying ever increasing amounts of the funny paper being issued, at some point an accident could occur which blows the top off interest rates. I believe the areas to watch for trouble is a 10 year rising above 5% and a sudden rise in unemployment that is sustained.
My sources tell me there is continuing trouble in the real estate sector, with near record inventory of homes to sell and more coming on line, we still have not had the pressure on prices in general one would think would occur, except in ares like MIami condos. SUBPRIME WOES have hurt big time resulting in plunging profits for most mortgage companies. Credit standards are rising making it harder for some to get loans.
BUT, without a real estate sector to attract funds away from the stock markets, I find it hard to predict an end to this bull market cycle. Our debtors and the US are tied to the hip in mutual need.
AMAZON jumps over 20% on better than expected earnings, the bubble has returned. EBAY reports tonight, it is my guess should they excite and raise guidance, possible repeat on their share price.
80% plus upside volume yesterday, until some 80% plus downside volume arrives, trend is firmly UP intermediate term. IMHO
Call me stubborn, I do not feel it PRUDENT to put NEW MONIES into the US stock market at these levels.
Calling A TOP is not an easy business, the usual signs of one are not currently present, though a correction could occur at any time.
D
Tuesday, April 10, 2007
HOUSING HOSE DOWN
AP
D.R. Horton 2Q Orders Fall 37 PercentTuesday April 10, 10:24 am ET
D.R. Horton 2nd-Quarter Net Sales Orders Decline, Hurt by Sagging Market
FORT WORTH, Texas (AP) -- D.R. Horton Inc., the nation's largest homebuilder by deliveries, said Tuesday its second-quarter sales orders fell 37 percent, led by even steeper declines in California and the Southwest.
**I feel stock market could hold up for various reasons thru the summer or trade net sideways, but I have feeling come next OCT, OCT is going to be OCT this time around.
D
D.R. Horton 2Q Orders Fall 37 PercentTuesday April 10, 10:24 am ET
D.R. Horton 2nd-Quarter Net Sales Orders Decline, Hurt by Sagging Market
FORT WORTH, Texas (AP) -- D.R. Horton Inc., the nation's largest homebuilder by deliveries, said Tuesday its second-quarter sales orders fell 37 percent, led by even steeper declines in California and the Southwest.
**I feel stock market could hold up for various reasons thru the summer or trade net sideways, but I have feeling come next OCT, OCT is going to be OCT this time around.
D
Monday, April 09, 2007
BILL BUCKLER of THE PRIVATEER
BEST OF BILL BUCKLER (source http://www.investmentrarities.com/archives.html )
March 28, 2007
After the initial uproar over the US subprime mortgage sector debacle, things have gone rather quiet, at least in the US major financial news media. But the contagion is spreading, affecting numerous other areas. In the background lies this. Between 2000 and 2006, US house prices climbed by 75 percent as counted in constant US Dollars. There is no US historical precedent for such a climb in the last 120 years! Further behind this housing bubble stand two huge US financial institutions, Freddie Mac and Fannie Mae. They specialise in buying mortgages originated by banks and other lenders which they re-package into mortgage-backed securities (MBS) which they re-sell to pension plans, fund managers and investment banks inside and outside the US. US subprime and Alt A (the credit category above subprime) mortgages accounted for 26 to 30 percent of outstanding US mortgages and about 40 percent of total US securitised mortgage issuance.
How To Blow Financial Bubbles:
From the start of 1991 until the beginning of 2004 (the last year the books of these two institutions were in some kind of order) the self-owned mortgage portfolios of Fannie and Freddie grew from $US135 Billion to $US 1.56 TRILLION. Their holdings of US mortgages grew from about 5 percent of the total US mortgage market to more than 20 percent. To buy all these mortgages, Fannie and Freddie have to borrow. Their combined debts have climbed as they issued $US 3 TRILLION in new debts. They have total debts of $US 5.2 TRILLION. Behind them stands an "implicit" Federal Government guarantee.
For themselves, Fannie and Freddie have $US 79 Billion in capital but they have guaranteed $US 3.8 TRILLION in US mortgage loans. That is nearly 30 percent of the US Gross Domestic Product (GDP).
US Mortgage Belt Update:
In the last three months of 2006, US lenders began foreclosure proceedings on about one out of every 200 mortgages, the highest rate on record dating back 37 years, according to the US Mortgage Bankers Association. Some 1.5 million American homeowners will face foreclosure this year, RealtyTrac says.
The US housing market is now beset by falling prices with too much inventory and now foreclosure sales will arrive. In January, there were 4.09 million new and previously owned homes for sale, up from 3.41 million a year earlier, according to data from the National Association of Realtors and the US Commerce Department. US initiation of foreclosures on homeowner loans accelerated in the fourth quarter to the fastest pace since the US Mortgage Bankers Association began its own survey 37 years ago.
Ó 2007 – The Privateer
http://www.the-privateer.com
capt@the-privateer.com
**We cannot see the future, but one can guess from looking at history, what possible, more probable outcomes might be ahead of us. The credit expansion we have been witnessing, blowing almost every asset class up with it, is unsustainable in perpetuity. How it deflates will determine living standards for many years to come.
I am IN CASH because I believe assets are over priced, and I will wait with BUYING power to scoop them up. I have rid myself of debt. But if we get a defaltionary spiral from the unwinding of these credit excesses, the winners will be those who lose the least as RR likes to say.
D
March 28, 2007
After the initial uproar over the US subprime mortgage sector debacle, things have gone rather quiet, at least in the US major financial news media. But the contagion is spreading, affecting numerous other areas. In the background lies this. Between 2000 and 2006, US house prices climbed by 75 percent as counted in constant US Dollars. There is no US historical precedent for such a climb in the last 120 years! Further behind this housing bubble stand two huge US financial institutions, Freddie Mac and Fannie Mae. They specialise in buying mortgages originated by banks and other lenders which they re-package into mortgage-backed securities (MBS) which they re-sell to pension plans, fund managers and investment banks inside and outside the US. US subprime and Alt A (the credit category above subprime) mortgages accounted for 26 to 30 percent of outstanding US mortgages and about 40 percent of total US securitised mortgage issuance.
How To Blow Financial Bubbles:
From the start of 1991 until the beginning of 2004 (the last year the books of these two institutions were in some kind of order) the self-owned mortgage portfolios of Fannie and Freddie grew from $US135 Billion to $US 1.56 TRILLION. Their holdings of US mortgages grew from about 5 percent of the total US mortgage market to more than 20 percent. To buy all these mortgages, Fannie and Freddie have to borrow. Their combined debts have climbed as they issued $US 3 TRILLION in new debts. They have total debts of $US 5.2 TRILLION. Behind them stands an "implicit" Federal Government guarantee.
For themselves, Fannie and Freddie have $US 79 Billion in capital but they have guaranteed $US 3.8 TRILLION in US mortgage loans. That is nearly 30 percent of the US Gross Domestic Product (GDP).
US Mortgage Belt Update:
In the last three months of 2006, US lenders began foreclosure proceedings on about one out of every 200 mortgages, the highest rate on record dating back 37 years, according to the US Mortgage Bankers Association. Some 1.5 million American homeowners will face foreclosure this year, RealtyTrac says.
The US housing market is now beset by falling prices with too much inventory and now foreclosure sales will arrive. In January, there were 4.09 million new and previously owned homes for sale, up from 3.41 million a year earlier, according to data from the National Association of Realtors and the US Commerce Department. US initiation of foreclosures on homeowner loans accelerated in the fourth quarter to the fastest pace since the US Mortgage Bankers Association began its own survey 37 years ago.
Ó 2007 – The Privateer
http://www.the-privateer.com
capt@the-privateer.com
**We cannot see the future, but one can guess from looking at history, what possible, more probable outcomes might be ahead of us. The credit expansion we have been witnessing, blowing almost every asset class up with it, is unsustainable in perpetuity. How it deflates will determine living standards for many years to come.
I am IN CASH because I believe assets are over priced, and I will wait with BUYING power to scoop them up. I have rid myself of debt. But if we get a defaltionary spiral from the unwinding of these credit excesses, the winners will be those who lose the least as RR likes to say.
D
RENEWABLE FUELS ORG
http://www.ethanolrfa.org/ an Industry view point.
A reader was earlier PO'D by my post on Ethanol subsidies, it really is not the main point as to WHO gets it, is that TAX PAYERS are footing the bill to produce it. It was argued that OIL COMPANIES, the blenders are the main beneficiaries of this 51 cent per gallon give away.
And that wouldn't surprise me at all.......nor did the $10B profit per qtr at Exxon. (yet Valediz spill not settled?)
D
A reader was earlier PO'D by my post on Ethanol subsidies, it really is not the main point as to WHO gets it, is that TAX PAYERS are footing the bill to produce it. It was argued that OIL COMPANIES, the blenders are the main beneficiaries of this 51 cent per gallon give away.
And that wouldn't surprise me at all.......nor did the $10B profit per qtr at Exxon. (yet Valediz spill not settled?)
D
ETHANOL DEBATE
http://www.ncga.com/ethanol/debunking/
http://www.mndaily.com/articles/2006/12/07/70211
Corn isn't the best when it comes to making ethanol, despite what publicity may say.
here's something Farmer John doesn't want you to know about. His friends in the corn lobby don't want you to know either. The secret? Making ethanol from sugar is cheaper and can produce eight times more energy than corn. Chevy ads and E85 publicity would lead you to believe otherwise, but corn isn't the best when it comes to making ethanol.
http://www.businessweek.com/technology/content/may2006/tc20060519_225336.htm ethanol myths and realities
http://seattletimes.nwsource.com/html/nationworld/2003612429_ethanol11.html?syndication=rss truth about ethanol
http://www.kxmc.com/getARticle.asp?ArticleId=33815
http://www.taxpayer.net/energy/ethanol.htm
http://www.ncpa.org/pd/monthly/pd1195b.html
http://jdo.org/foxman/and.htm ADM corporate welfare?
http://www.ethanol-news.com/archives/ethanol_subsidy.htm
http://beef-mag.com/mag/beef_bursting_ethanol_bubble/
The debate will rage on,
http://www.mndaily.com/articles/2006/12/07/70211
Corn isn't the best when it comes to making ethanol, despite what publicity may say.
here's something Farmer John doesn't want you to know about. His friends in the corn lobby don't want you to know either. The secret? Making ethanol from sugar is cheaper and can produce eight times more energy than corn. Chevy ads and E85 publicity would lead you to believe otherwise, but corn isn't the best when it comes to making ethanol.
http://www.businessweek.com/technology/content/may2006/tc20060519_225336.htm ethanol myths and realities
http://seattletimes.nwsource.com/html/nationworld/2003612429_ethanol11.html?syndication=rss truth about ethanol
http://www.kxmc.com/getARticle.asp?ArticleId=33815
http://www.taxpayer.net/energy/ethanol.htm
http://www.ncpa.org/pd/monthly/pd1195b.html
http://jdo.org/foxman/and.htm ADM corporate welfare?
http://www.ethanol-news.com/archives/ethanol_subsidy.htm
http://beef-mag.com/mag/beef_bursting_ethanol_bubble/
The debate will rage on,
47 YEAR DOW CHART
*(click to enlarge)Scotty, when the engines of credit halt, this will collapse like the Hindendburg. We are seeing the beginnings in the sub prime markets, there is danger of trickle down or domino effect.
The housing ATM is SHUT DOWN folks, where ELSE is there to steal from ? Our country is bankrupt, sold out to CHINA! and the special interest groups andanyone with a fing connection to a politician.
OK, I cant go any further with this today, acid churning in my stomach.
D
Saturday, April 07, 2007
BIOFUELS
How Biofuels Could Starve the PoorBy C. Ford Runge and Benjamin Senauer
From Foreign Affairs, May/June 2007
Summary: Thanks to high oil prices and hefty subsidies, corn-based ethanol is now all the rage in the United States. But it takes so much supply to keep ethanol production going that the price of corn -- and those of other food staples -- is shooting up around the world. To stop this trend, and prevent even more people from going hungry, Washington must conserve more and diversify ethanol's production inputs.
C. Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law and Director of the Center for International Food and Agricultural Policy at the University of Minnesota. Benjamin Senauer is Professor of Applied Economics and Co-director of the Food Industry Center at the University of Minnesota.
THE ETHANOL BUBBLE
In 1974, as the United States was reeling from the oil embargo imposed by the Organization of Petroleum Exporting Countries, Congress took the first of many legislative steps to promote ethanol made from corn as an alternative fuel. On April 18, 1977, amid mounting calls for energy independence, President Jimmy Carter donned his cardigan sweater and appeared on television to tell Americans that balancing energy demands with available domestic resources would be an effort the "moral equivalent of war." The gradual phaseout of lead in the 1970s and 1980s provided an additional boost to the fledgling ethanol industry. (Lead, a toxic substance, is a performance enhancer when added to gasoline, and it was partly replaced by ethanol.) A series of tax breaks and subsidies also helped. In spite of these measures, with each passing year the United States became more dependent on imported petroleum, and ethanol remained marginal at best.
Now, thanks to a combination of high oil prices and even more generous government subsidies, corn-based ethanol has become the rage. There were 110 ethanol refineries in operation in the United States at the end of 2006, according to the Renewable Fuels Association. Many were being expanded, and another 73 were under construction. When these projects are completed, by the end of 2008, the United States' ethanol production capacity will reach an estimated 11.4 billion gallons per year. In his latest State of the Union address, President George W. Bush called on the country to produce 35 billion gallons of renewable fuel a year by 2017, nearly five times the level currently mandated.
The push for ethanol and other biofuels has spawned an industry that depends on billions of dollars of taxpayer subsidies, and not only in the United States. In 2005, global ethanol production was 9.66 billion gallons, of which Brazil produced 45.2 percent (from sugar cane) and the United States 44.5 percent (from corn). Global production of biodiesel (most of it in Europe), made from oilseeds, was almost one billion gallons.
The industry's growth has meant that a larger and larger share of corn production is being used to feed the huge mills that produce ethanol. According to some estimates, ethanol plants will burn up to half of U.S. domestic corn supplies within a few years. Ethanol demand will bring 2007 inventories of corn to their lowest levels since 1995 (a drought year), even though 2006 yielded the third-largest corn crop on record. Iowa may soon become a net corn importer.
The enormous volume of corn required by the ethanol industry is sending shock waves through the food system. (The United States accounts for some 40 percent of the world's total corn production and over half of all corn exports.) In March 2007, corn futures rose to over $4.38 a bushel, the highest level in ten years. Wheat and rice prices have also surged to decade highs, because even as those grains are increasingly being used as substitutes for corn, farmers are planting more acres with corn and fewer acres with other crops.
This might sound like nirvana to corn producers, but it is hardly that for consumers, especially in poor developing countries, who will be hit with a double shock if both food prices and oil prices stay high. The World Bank has estimated that in 2001, 2.7 billion people in the world were living on the equivalent of less than $2 a day; to them, even marginal increases in the cost of staple grains could be devastating. filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn -- which contains enough calories to feed one person for a year. By putting pressure on global supplies of edible crops, the surge in ethanol production will translate into higher prices for both processed and staple foods around the world. Biofuels have tied oil and food prices together in ways that could profoundly upset the relationships between food producers, consumers, and nations in the years ahead, with potentially devastating implications for both global poverty and food security.
THE OIL AND BIOFUEL ECONOMY
In the United States and other large economies, the ethanol industry is artificially buoyed by government subsidies, minimum production levels, and tax credits. High oil prices over the past few years have made ethanol naturally competitive, but the U.S. government continues to heavily subsidize corn farmers and ethanol producers. Direct corn subsidies equaled $8.9 billion in 2005. Although these payments will fall in 2006 and 2007 because of high corn prices, they may soon be dwarfed by the panoply of tax credits, grants, and government loans included in energy legislation passed in 2005 and in a pending farm bill designed to support ethanol producers. The federal government already grants ethanol blenders a tax allowance of 51 cents per gallon of ethanol they make, and many states pay out additional subsidies.
Consumption of ethanol in the United States was expected to reach over 6 billion gallons in 2006. (Consumption of biodiesel was expected to be about 250 million gallons.) In 2005, the U.S. government mandated the use of 7.5 billion gallons of biofuels per year by 2012; in early 2007, 37 governors proposed raising that figure to 12 billion gallons by 2010; and last January, President Bush raised it further, to 35 billion gallons by 2017. Six billion gallons of ethanol are needed every year to replace the fuel additive known as MTBE, which is being phased out due to its polluting effects on ground water.
The European Commission is using legislative measures and directives to promote biodiesel, produced mainly in Europe, made from rapeseeds and sunflower seeds. In 2005, the European Union produced 890 million gallons of biodiesel, over 80 percent of the world's total. The eu's Common Agricultural Policy also promotes the production of ethanol from a combination of sugar beets and wheat with direct and indirect subsidies. Brussels aims to have 5.75 percent of motor fuel consumed in the European Union come from biofuels by 2010 and 10 percent by 2020.
Brazil, which currently produces approximately the same amount of ethanol as the United States, derives almost all of it from sugar cane. Like the United States, Brazil began its quest for alternative energy in the mid-1970s. The government has offered incentives, set technical standards, and invested in supporting technologies and market promotion. It has mandated that all diesel contain two percent biodiesel by 2008 and five percent biodiesel by 2013. It has also required that the auto industry produce engines that can use biofuels and has developed wide-ranging industrial and land-use strategies to promote them. Other countries are also jumping on the biofuel bandwagon. In Southeast Asia, vast areas of tropical forest are being cleared and burned to plant oil palms destined for conversion to biodiesel.
This trend has strong momentum. Despite a recent decline, many experts expect the price of crude oil to remain high in the long term. Demand for petroleum continues to increase faster than supplies, and new sources of oil are often expensive to exploit or located in politically risky areas. According to the U.S. Energy Information Administration's latest projections, global energy consumption will rise by 71 percent between 2003 and 2030, with demand from developing countries, notably China and India, surpassing that from members of the Organization for Economic Cooperation and Development by 2015. The result will be sustained upward pressure on oil prices, which will allow ethanol and biodiesel producers to pay much higher premiums for corn and oilseeds than was conceivable just a few years ago. The higher oil prices go, the higher ethanol prices can go while remaining competitive -- and the more ethanol producers can pay for corn. If oil reaches $80 per barrel, ethanol producers could afford to pay well over $5 per bushel for corn.
With the price of raw materials at such highs, the biofuel craze would place significant stress on other parts of the agricultural sector. In fact, it already does. In the United States, the growth of the biofuel industry has triggered increases not only in the prices of corn, oilseeds, and other grains but also in the prices of seemingly unrelated crops and products. The use of land to grow corn to feed the ethanol maw is reducing the acreage devoted to other crops. Food processors who use crops such as peas and sweet corn have been forced to pay higher prices to keep their supplies secure -- costs that will eventually be passed on to consumers. Rising feed prices are also hitting the livestock and poultry industries. According to Vernon Eidman, a professor emeritus of agribusiness management at the University of Minnesota, higher feed costs have caused returns to fall sharply, especially in the poultry and swine sectors. If returns continue to drop, production will decline, and the prices for chicken, turkey, pork, milk, and eggs will rise. A number of Iowa's pork producers could go out of business in the next few years as they are forced to compete with ethanol plants for corn supplies.
Proponents of corn-based ethanol argue that acreage and yields can be increased to satisfy the rising demand for ethanol. But U.S. corn yields have been rising by a little less than two percent annually over the last ten years, and even a doubling of those gains could not meet current demand. As more acres are planted with corn, land will have to be pulled from other crops or environmentally fragile areas, such as those protected by the Department of Agriculture's Conservation Reserve Program.
In addition to these fundamental forces, speculative pressures have created what might be called a "biofuel mania": prices are rising because many buyers think they will. Hedge funds are making huge bets on corn and the bull market unleashed by ethanol. The biofuel mania is commandeering grain stocks with a disregard for the obvious consequences. It seems to unite powerful forces, including motorists' enthusiasm for large, fuel-inefficient vehicles and guilt over the ecological consequences of petroleum-based fuels. But even as ethanol has created opportunities for huge profits for agribusiness, speculators, and some farmers, it has upset the traditional flows of commodities and the patterns of trade and consumption both inside and outside of the agricultural sector.
This craze will create a different problem if oil prices decline because of, say, a slowdown in the global economy. With oil at $30 a barrel, producing ethanol would no longer be profitable unless corn sold for less than $2 a bushel, and that would spell a return to the bad old days of low prices for U.S. farmers. Undercapitalized ethanol plants would be at risk, and farmer-owned cooperatives would be especially vulnerable. Calls for subsidies, mandates, and tax breaks would become even more shrill than they are now: there would be clamoring for a massive bailout of an overinvested industry. At that point, the major investments that have been made in biofuels would start to look like a failed gamble. On the other hand, if oil prices hover around $55-$60, ethanol producers could pay from $3.65 to $4.54 for a bushel of corn and manage to make a normal 12 percent profit.
Whatever happens in the oil market, the drive for energy independence, which has been the basic justification for huge investments in and subsidies for ethanol production, has already made the industry dependent on high oil prices.
CORNUCOPIA
One root of the problem is that the biofuel industry has long been dominated not by market forces but by politics and the interests of a few large companies. Corn has become the prime raw material even though 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.
Since the late 1960s, adm positioned itself as the "supermarket to the world" and aimed to create value from bulk commodities by transforming them into processed products that command heftier prices. In the 1970s, adm started making ethanol and other products resulting from the wet-milling of corn, such as high fructose corn syrup. It quickly grew from a minor player in the feed market to a global powerhouse. By 1980, adm's ethanol production had reached 175 million gallons per year, and high fructose corn syrup had become a ubiquitous sweetening agent in processed foods. In 2006, adm was the largest producer of ethanol in the United States: it made more than 1.07 billion gallons, over four times more than its nearest rival, VeraSun Energy. In early 2006, it announced plans to increase its capital investment in ethanol from $700 million to $1.2 billion in 2008 and increase production by 47 percent, or close to 500 million gallons, by 2009.
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.
Partly as a result of such government support, ethanol (and to a lesser extent biodiesel) is now a major fixture of the United States' agricultural and energy sectors. In addition to the federal government's 51-cents-per-gallon tax credit for ethanol, smaller producers get a 10-cents-per-gallon tax reduction on the first 15 million gallons they produce. There is also the "renewable fuel standard," a mandatory level of nonfossil fuel to be used in motor vehicles, which has set off a political bidding war. Despite already high government subsidies, Congress is considering lavishing more money on biofuels. Legislation related to the 2007 farm bill introduced by Representative Ron Kind (D-Wis.) calls for raising loan guarantees for ethanol producers from $200 million to $2 billion. Advocates of corn-based ethanol have rationalized subsidies by pointing out that greater ethanol demand pushes up corn prices and brings down subsidies to corn growers.
The ethanol industry has also become a theater of protectionism in U.S. trade policy. Unlike oil imports, which come into the country duty-free, most ethanol currently imported into the United States carries a 54-cents-per-gallon tariff, partly because cheaper ethanol from countries such as Brazil threatens U.S. producers. (Brazilian sugar cane can be converted to ethanol more efficiently than can U.S. corn.) The Caribbean Basin Initiative could undermine this protection: Brazilian ethanol can already be shipped duty-free to CBI countries, such as Costa Rica, El Salvador, or Jamaica, and the agreement allows it to go duty-free from there to the United States. But ethanol supporters in Congress are pushing for additional legislation to limit those imports. Such government measures shield the industry from competition despite the damaging repercussions for consumers.
STARVING THE HUNGRY
Biofuels may have even more devastating effects in the rest of the world, especially on the prices of basic foods. If oil prices remain high -- which is likely -- the people most vulnerable to the price hikes brought on by the biofuel boom will be those in countries that both suffer food deficits and import petroleum. The risk extends to a large part of the developing world: in 2005, according to the un Food and Agriculture Organization, most of the 82 low-income countries with food deficits were also net oil importers.
Even major oil exporters that use their petrodollars to purchase food imports, such as Mexico, cannot escape the consequences of the hikes in food prices. In late 2006, the price of tortilla flour in Mexico, which gets 80 percent of its corn imports from the United States, doubled thanks partly to a rise in U.S. corn prices from $2.80 to $4.20 a bushel over the previous several months. (Prices rose even though tortillas are made mainly from Mexican-grown white corn because industrial users of the imported yellow corn, which is used for animal feed and processed foods, started buying the cheaper white variety.) The price surge was exacerbated by speculation and hoarding. With about half of Mexico's 107 million people living in poverty and relying on tortillas as a main source of calories, the public outcry was fierce. In January 2007, Mexico's new president, Felipe Calderón, was forced to cap the prices of corn products.
The International Food Policy Research Institute, in Washington, D.C., has produced sobering estimates of the potential global impact of the rising demand for biofuels. Mark Rosegrant, an ifpri division director, and his colleagues project that given continued high oil prices, the rapid increase in global biofuel production will push global corn prices up by 20 percent by 2010 and 41 percent by 2020. The prices of oilseeds, including soybeans, rapeseeds, and sunflower seeds, are projected to rise by 26 percent by 2010 and 76 percent by 2020, and wheat prices by 11 percent by 2010 and 30 percent by 2020. In the poorest parts of sub-Saharan Africa, Asia, and Latin America, where cassava is a staple, its price is expected to increase by 33 percent by 2010 and 135 percent by 2020. The projected price increases may be mitigated if crop yields increase substantially or ethanol production based on other raw materials (such as trees and grasses) becomes commercially viable. But unless biofuel policies change significantly, neither development is likely.
The production of cassava-based ethanol may pose an especially grave threat to the food security of the world's poor. Cassava, a tropical potato-like tuber also known as manioc, provides one-third of the caloric needs of the population in sub-Saharan Africa and is the primary staple for over 200 million of Africa's poorest people. In many tropical countries, it is the food people turn to when they cannot afford anything else. It also serves as an important reserve when other crops fail because it can grow in poor soils and dry conditions and can be left in the ground to be harvested as needed.
Thanks to its high-starch content, cassava is also an excellent source of ethanol. As the technology for converting it to fuel improves, many countries -- including China, Nigeria, and Thailand -- are considering using more of the crop to that end. If peasant farmers in developing countries could become suppliers for the emerging industry, they would benefit from the increased income. But the history of industrial demand for agricultural crops in these countries suggests that large producers will be the main beneficiaries. The likely result of a boom in cassava-based ethanol production is that an increasing number of poor people will struggle even more to feed themselves.
Participants in the 1996 World Food Summit set out to cut the number of chronically hungry people in the world -- people who do not eat enough calories regularly to be healthy and active -- from 823 million in 1990 to about 400 million by 2015. The Millennium Development Goals established by the United Nations in 2000 vowed to halve the proportion of the world's chronically underfed population from 16 percent in 1990 to eight percent in 2015. Realistically, however, resorting to biofuels is likely to exacerbate world hunger. Several studies by economists at the World Bank and elsewhere suggest that caloric consumption among the world's poor declines by about half of one percent whenever the average prices of all major food staples increase by one percent. When one staple becomes more expensive, people try to replace it with a cheaper one, but if the prices of nearly all staples go up, they are left with no alternative.
In a study of global food security we conducted in 2003, we projected that given the rates of economic and population growth, the number of hungry people throughout the world would decline by 23 percent, to about 625 million, by 2025, so long as agricultural productivity improved enough to keep the relative price of food constant. But if, all other things being equal, the prices of staple foods increased because of demand for biofuels, as the ifpri projections suggest they will, the number of food-insecure people in the world would rise by over 16 million for every percentage increase in the real prices of staple foods. That means that 1.2 billion people could be chronically hungry by 2025 -- 600 million more than previously predicted.
The world's poorest people already spend 50 to 80 percent of their total household income on food. For the many among them who are landless laborers or rural subsistence farmers, large increases in the prices of staple foods will mean malnutrition and hunger. Some of them will tumble over the edge of subsistence into outright starvation, and many more will die from a multitude of hunger-related diseases.
THE GRASS IS GREENER
And for what? Limited environmental benefits at best. Although it is important to think of ways to develop renewable energy, one should also carefully examine the eager claims that biofuels are "green." Ethanol and biodiesel are often viewed as environmentally friendly because they are plant-based rather than petroleum-based. In fact, even if the entire corn crop in the United States were used to make ethanol, that fuel would replace only 12 percent of current U.S. gasoline use. Thinking of ethanol as a green alternative to fossil fuels reinforces the chimera of energy independence and of decoupling the interests of the United States from an increasingly troubled Middle East.
Should corn and soybeans be used as fuel crops at all? 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. In the United States, corn and soybeans are typically planted in rotation, because soybeans add nitrogen to the soil, which corn needs to grow. But as corn increasingly displaces soybeans as a main source of ethanol, it will be cropped continuously, which will require major increases in nitrogen fertilizer and aggravate the nitrogen runoff problem.
Nor is corn-based ethanol very fuel efficient. Debates over the "net energy balance" of biofuels and gasoline -- the ratio between the energy they produce and the energy needed to produce them -- have raged for decades. For now, corn-based ethanol appears to be favored over gasoline, and biodiesel over petroleum diesel -- but not by much. Scientists at the Argonne National Laboratory and the National Renewable Energy Laboratory have calculated that the net energy ratio of gasoline is 0.81, a result that implies an input larger than the output. Corn-based ethanol has a ratio that ranges between 1.25 and 1.35, which is better than breaking even. Petroleum diesel has an energy ratio of 0.83, compared with that of biodiesel made from soybean oil, which ranges from 1.93 to 3.21. (Biodiesel produced from other fats and oils, such as restaurant grease, may be more energy efficient.)
Similar results emerge when biofuels are compared with gasoline using other indices of environmental impact, such as greenhouse gas emissions. The full cycle of the production and use of corn-based ethanol releases less greenhouse gases than does that of gasoline, but only by 12 to 26 percent. The production and use of biodiesel emits 41 to 78 percent less such gases than do the production and use of petroleum-based diesel fuels.
Another point of comparison is greenhouse gas emissions per mile driven, which takes account of relative fuel efficiency. Using gasoline blends with 10 percent corn-based ethanol instead of pure gasoline lowers emissions by 2 percent. If the blend is 85 percent ethanol (which only flexible-fuel vehicles can run on), greenhouse gas emissions fall further: by 23 percent if the ethanol is corn-based and by 64 percent if it is cellulose-based. Likewise, diesel containing 2 percent biodiesel emits 1.6 percent less greenhouse gases than does petroleum diesel, whereas blends with 20 percent biodiesel emit 16 percent less, and pure biodiesel (also for use only in special vehicles) emits 78 percent less. On the other hand, biodiesel can increase emissions of nitrogen oxide, which contributes to air pollution. In short, the "green" virtues of ethanol and biodiesel are modest when these fuels are made from corn and soybeans, which are energy-intensive, highly polluting row crops.
The benefits of biofuels are greater when plants other than corn or oils from sources other than soybeans are used. Ethanol made entirely from cellulose (which is found in trees, grasses, and other plants) has an energy ratio between 5 and 6 and emits 82 to 85 percent less greenhouse gases than does gasoline. As corn grows scarcer and more expensive, many are betting that the ethanol industry will increasingly turn to grasses, trees, and residues from field crops, such as wheat and rice straw and cornstalks. Grasses and trees can be grown on land poorly suited to food crops or in climates hostile to corn and soybeans. Recent breakthroughs in enzyme and gasification technologies have made it easier to break down cellulose in woody plants and straw. field experiments suggest that grassland perennials could become a promising source of biofuel in the future.
For now, however, the costs of harvesting, transporting, and converting such plant matters are high, which means that cellulose-based ethanol is not yet commercially viable when compared with the economies of scale of current corn-based production. One ethanol-plant manager in the Midwest has calculated that fueling an ethanol plant with switchgrass, a much-discussed alternative, would require delivering a semitrailer truckload of the grass every six minutes, 24 hours a day. The logistical difficulties and the costs of converting cellulose into fuel, combined with the subsidies and politics currently favoring the use of corn and soybeans, make it unrealistic to expect cellulose-based ethanol to become a solution within the next decade. Until it is, relying more on sugar cane to produce ethanol in tropical countries would be more efficient than using corn and would not involve using a staple food.
The future can be brighter if the right steps are taken now. Limiting U.S. dependence on fossil fuels requires a comprehensive energy-conservation program. Rather than promoting more mandates, tax breaks, and subsidies for biofuels, the U.S. government should make a major commitment to substantially increasing energy efficiency in vehicles, homes, and factories; promoting alternative sources of energy, such as solar and wind power; and investing in research to improve agricultural productivity and raise the efficiency of fuels derived from cellulose. Washington's fixation on corn-based ethanol has distorted the national agenda and diverted its attention from developing a broad and balanced strategy. In March, the U.S. Energy Department announced that it would invest up to $385 million in six biorefineries designed to convert cellulose into ethanol. That is a promising step in the right direction.
From Foreign Affairs, May/June 2007
Summary: Thanks to high oil prices and hefty subsidies, corn-based ethanol is now all the rage in the United States. But it takes so much supply to keep ethanol production going that the price of corn -- and those of other food staples -- is shooting up around the world. To stop this trend, and prevent even more people from going hungry, Washington must conserve more and diversify ethanol's production inputs.
C. Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law and Director of the Center for International Food and Agricultural Policy at the University of Minnesota. Benjamin Senauer is Professor of Applied Economics and Co-director of the Food Industry Center at the University of Minnesota.
THE ETHANOL BUBBLE
In 1974, as the United States was reeling from the oil embargo imposed by the Organization of Petroleum Exporting Countries, Congress took the first of many legislative steps to promote ethanol made from corn as an alternative fuel. On April 18, 1977, amid mounting calls for energy independence, President Jimmy Carter donned his cardigan sweater and appeared on television to tell Americans that balancing energy demands with available domestic resources would be an effort the "moral equivalent of war." The gradual phaseout of lead in the 1970s and 1980s provided an additional boost to the fledgling ethanol industry. (Lead, a toxic substance, is a performance enhancer when added to gasoline, and it was partly replaced by ethanol.) A series of tax breaks and subsidies also helped. In spite of these measures, with each passing year the United States became more dependent on imported petroleum, and ethanol remained marginal at best.
Now, thanks to a combination of high oil prices and even more generous government subsidies, corn-based ethanol has become the rage. There were 110 ethanol refineries in operation in the United States at the end of 2006, according to the Renewable Fuels Association. Many were being expanded, and another 73 were under construction. When these projects are completed, by the end of 2008, the United States' ethanol production capacity will reach an estimated 11.4 billion gallons per year. In his latest State of the Union address, President George W. Bush called on the country to produce 35 billion gallons of renewable fuel a year by 2017, nearly five times the level currently mandated.
The push for ethanol and other biofuels has spawned an industry that depends on billions of dollars of taxpayer subsidies, and not only in the United States. In 2005, global ethanol production was 9.66 billion gallons, of which Brazil produced 45.2 percent (from sugar cane) and the United States 44.5 percent (from corn). Global production of biodiesel (most of it in Europe), made from oilseeds, was almost one billion gallons.
The industry's growth has meant that a larger and larger share of corn production is being used to feed the huge mills that produce ethanol. According to some estimates, ethanol plants will burn up to half of U.S. domestic corn supplies within a few years. Ethanol demand will bring 2007 inventories of corn to their lowest levels since 1995 (a drought year), even though 2006 yielded the third-largest corn crop on record. Iowa may soon become a net corn importer.
The enormous volume of corn required by the ethanol industry is sending shock waves through the food system. (The United States accounts for some 40 percent of the world's total corn production and over half of all corn exports.) In March 2007, corn futures rose to over $4.38 a bushel, the highest level in ten years. Wheat and rice prices have also surged to decade highs, because even as those grains are increasingly being used as substitutes for corn, farmers are planting more acres with corn and fewer acres with other crops.
This might sound like nirvana to corn producers, but it is hardly that for consumers, especially in poor developing countries, who will be hit with a double shock if both food prices and oil prices stay high. The World Bank has estimated that in 2001, 2.7 billion people in the world were living on the equivalent of less than $2 a day; to them, even marginal increases in the cost of staple grains could be devastating. filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn -- which contains enough calories to feed one person for a year. By putting pressure on global supplies of edible crops, the surge in ethanol production will translate into higher prices for both processed and staple foods around the world. Biofuels have tied oil and food prices together in ways that could profoundly upset the relationships between food producers, consumers, and nations in the years ahead, with potentially devastating implications for both global poverty and food security.
THE OIL AND BIOFUEL ECONOMY
In the United States and other large economies, the ethanol industry is artificially buoyed by government subsidies, minimum production levels, and tax credits. High oil prices over the past few years have made ethanol naturally competitive, but the U.S. government continues to heavily subsidize corn farmers and ethanol producers. Direct corn subsidies equaled $8.9 billion in 2005. Although these payments will fall in 2006 and 2007 because of high corn prices, they may soon be dwarfed by the panoply of tax credits, grants, and government loans included in energy legislation passed in 2005 and in a pending farm bill designed to support ethanol producers. The federal government already grants ethanol blenders a tax allowance of 51 cents per gallon of ethanol they make, and many states pay out additional subsidies.
Consumption of ethanol in the United States was expected to reach over 6 billion gallons in 2006. (Consumption of biodiesel was expected to be about 250 million gallons.) In 2005, the U.S. government mandated the use of 7.5 billion gallons of biofuels per year by 2012; in early 2007, 37 governors proposed raising that figure to 12 billion gallons by 2010; and last January, President Bush raised it further, to 35 billion gallons by 2017. Six billion gallons of ethanol are needed every year to replace the fuel additive known as MTBE, which is being phased out due to its polluting effects on ground water.
The European Commission is using legislative measures and directives to promote biodiesel, produced mainly in Europe, made from rapeseeds and sunflower seeds. In 2005, the European Union produced 890 million gallons of biodiesel, over 80 percent of the world's total. The eu's Common Agricultural Policy also promotes the production of ethanol from a combination of sugar beets and wheat with direct and indirect subsidies. Brussels aims to have 5.75 percent of motor fuel consumed in the European Union come from biofuels by 2010 and 10 percent by 2020.
Brazil, which currently produces approximately the same amount of ethanol as the United States, derives almost all of it from sugar cane. Like the United States, Brazil began its quest for alternative energy in the mid-1970s. The government has offered incentives, set technical standards, and invested in supporting technologies and market promotion. It has mandated that all diesel contain two percent biodiesel by 2008 and five percent biodiesel by 2013. It has also required that the auto industry produce engines that can use biofuels and has developed wide-ranging industrial and land-use strategies to promote them. Other countries are also jumping on the biofuel bandwagon. In Southeast Asia, vast areas of tropical forest are being cleared and burned to plant oil palms destined for conversion to biodiesel.
This trend has strong momentum. Despite a recent decline, many experts expect the price of crude oil to remain high in the long term. Demand for petroleum continues to increase faster than supplies, and new sources of oil are often expensive to exploit or located in politically risky areas. According to the U.S. Energy Information Administration's latest projections, global energy consumption will rise by 71 percent between 2003 and 2030, with demand from developing countries, notably China and India, surpassing that from members of the Organization for Economic Cooperation and Development by 2015. The result will be sustained upward pressure on oil prices, which will allow ethanol and biodiesel producers to pay much higher premiums for corn and oilseeds than was conceivable just a few years ago. The higher oil prices go, the higher ethanol prices can go while remaining competitive -- and the more ethanol producers can pay for corn. If oil reaches $80 per barrel, ethanol producers could afford to pay well over $5 per bushel for corn.
With the price of raw materials at such highs, the biofuel craze would place significant stress on other parts of the agricultural sector. In fact, it already does. In the United States, the growth of the biofuel industry has triggered increases not only in the prices of corn, oilseeds, and other grains but also in the prices of seemingly unrelated crops and products. The use of land to grow corn to feed the ethanol maw is reducing the acreage devoted to other crops. Food processors who use crops such as peas and sweet corn have been forced to pay higher prices to keep their supplies secure -- costs that will eventually be passed on to consumers. Rising feed prices are also hitting the livestock and poultry industries. According to Vernon Eidman, a professor emeritus of agribusiness management at the University of Minnesota, higher feed costs have caused returns to fall sharply, especially in the poultry and swine sectors. If returns continue to drop, production will decline, and the prices for chicken, turkey, pork, milk, and eggs will rise. A number of Iowa's pork producers could go out of business in the next few years as they are forced to compete with ethanol plants for corn supplies.
Proponents of corn-based ethanol argue that acreage and yields can be increased to satisfy the rising demand for ethanol. But U.S. corn yields have been rising by a little less than two percent annually over the last ten years, and even a doubling of those gains could not meet current demand. As more acres are planted with corn, land will have to be pulled from other crops or environmentally fragile areas, such as those protected by the Department of Agriculture's Conservation Reserve Program.
In addition to these fundamental forces, speculative pressures have created what might be called a "biofuel mania": prices are rising because many buyers think they will. Hedge funds are making huge bets on corn and the bull market unleashed by ethanol. The biofuel mania is commandeering grain stocks with a disregard for the obvious consequences. It seems to unite powerful forces, including motorists' enthusiasm for large, fuel-inefficient vehicles and guilt over the ecological consequences of petroleum-based fuels. But even as ethanol has created opportunities for huge profits for agribusiness, speculators, and some farmers, it has upset the traditional flows of commodities and the patterns of trade and consumption both inside and outside of the agricultural sector.
This craze will create a different problem if oil prices decline because of, say, a slowdown in the global economy. With oil at $30 a barrel, producing ethanol would no longer be profitable unless corn sold for less than $2 a bushel, and that would spell a return to the bad old days of low prices for U.S. farmers. Undercapitalized ethanol plants would be at risk, and farmer-owned cooperatives would be especially vulnerable. Calls for subsidies, mandates, and tax breaks would become even more shrill than they are now: there would be clamoring for a massive bailout of an overinvested industry. At that point, the major investments that have been made in biofuels would start to look like a failed gamble. On the other hand, if oil prices hover around $55-$60, ethanol producers could pay from $3.65 to $4.54 for a bushel of corn and manage to make a normal 12 percent profit.
Whatever happens in the oil market, the drive for energy independence, which has been the basic justification for huge investments in and subsidies for ethanol production, has already made the industry dependent on high oil prices.
CORNUCOPIA
One root of the problem is that the biofuel industry has long been dominated not by market forces but by politics and the interests of a few large companies. Corn has become the prime raw material even though 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.
Since the late 1960s, adm positioned itself as the "supermarket to the world" and aimed to create value from bulk commodities by transforming them into processed products that command heftier prices. In the 1970s, adm started making ethanol and other products resulting from the wet-milling of corn, such as high fructose corn syrup. It quickly grew from a minor player in the feed market to a global powerhouse. By 1980, adm's ethanol production had reached 175 million gallons per year, and high fructose corn syrup had become a ubiquitous sweetening agent in processed foods. In 2006, adm was the largest producer of ethanol in the United States: it made more than 1.07 billion gallons, over four times more than its nearest rival, VeraSun Energy. In early 2006, it announced plans to increase its capital investment in ethanol from $700 million to $1.2 billion in 2008 and increase production by 47 percent, or close to 500 million gallons, by 2009.
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.
Partly as a result of such government support, ethanol (and to a lesser extent biodiesel) is now a major fixture of the United States' agricultural and energy sectors. In addition to the federal government's 51-cents-per-gallon tax credit for ethanol, smaller producers get a 10-cents-per-gallon tax reduction on the first 15 million gallons they produce. There is also the "renewable fuel standard," a mandatory level of nonfossil fuel to be used in motor vehicles, which has set off a political bidding war. Despite already high government subsidies, Congress is considering lavishing more money on biofuels. Legislation related to the 2007 farm bill introduced by Representative Ron Kind (D-Wis.) calls for raising loan guarantees for ethanol producers from $200 million to $2 billion. Advocates of corn-based ethanol have rationalized subsidies by pointing out that greater ethanol demand pushes up corn prices and brings down subsidies to corn growers.
The ethanol industry has also become a theater of protectionism in U.S. trade policy. Unlike oil imports, which come into the country duty-free, most ethanol currently imported into the United States carries a 54-cents-per-gallon tariff, partly because cheaper ethanol from countries such as Brazil threatens U.S. producers. (Brazilian sugar cane can be converted to ethanol more efficiently than can U.S. corn.) The Caribbean Basin Initiative could undermine this protection: Brazilian ethanol can already be shipped duty-free to CBI countries, such as Costa Rica, El Salvador, or Jamaica, and the agreement allows it to go duty-free from there to the United States. But ethanol supporters in Congress are pushing for additional legislation to limit those imports. Such government measures shield the industry from competition despite the damaging repercussions for consumers.
STARVING THE HUNGRY
Biofuels may have even more devastating effects in the rest of the world, especially on the prices of basic foods. If oil prices remain high -- which is likely -- the people most vulnerable to the price hikes brought on by the biofuel boom will be those in countries that both suffer food deficits and import petroleum. The risk extends to a large part of the developing world: in 2005, according to the un Food and Agriculture Organization, most of the 82 low-income countries with food deficits were also net oil importers.
Even major oil exporters that use their petrodollars to purchase food imports, such as Mexico, cannot escape the consequences of the hikes in food prices. In late 2006, the price of tortilla flour in Mexico, which gets 80 percent of its corn imports from the United States, doubled thanks partly to a rise in U.S. corn prices from $2.80 to $4.20 a bushel over the previous several months. (Prices rose even though tortillas are made mainly from Mexican-grown white corn because industrial users of the imported yellow corn, which is used for animal feed and processed foods, started buying the cheaper white variety.) The price surge was exacerbated by speculation and hoarding. With about half of Mexico's 107 million people living in poverty and relying on tortillas as a main source of calories, the public outcry was fierce. In January 2007, Mexico's new president, Felipe Calderón, was forced to cap the prices of corn products.
The International Food Policy Research Institute, in Washington, D.C., has produced sobering estimates of the potential global impact of the rising demand for biofuels. Mark Rosegrant, an ifpri division director, and his colleagues project that given continued high oil prices, the rapid increase in global biofuel production will push global corn prices up by 20 percent by 2010 and 41 percent by 2020. The prices of oilseeds, including soybeans, rapeseeds, and sunflower seeds, are projected to rise by 26 percent by 2010 and 76 percent by 2020, and wheat prices by 11 percent by 2010 and 30 percent by 2020. In the poorest parts of sub-Saharan Africa, Asia, and Latin America, where cassava is a staple, its price is expected to increase by 33 percent by 2010 and 135 percent by 2020. The projected price increases may be mitigated if crop yields increase substantially or ethanol production based on other raw materials (such as trees and grasses) becomes commercially viable. But unless biofuel policies change significantly, neither development is likely.
The production of cassava-based ethanol may pose an especially grave threat to the food security of the world's poor. Cassava, a tropical potato-like tuber also known as manioc, provides one-third of the caloric needs of the population in sub-Saharan Africa and is the primary staple for over 200 million of Africa's poorest people. In many tropical countries, it is the food people turn to when they cannot afford anything else. It also serves as an important reserve when other crops fail because it can grow in poor soils and dry conditions and can be left in the ground to be harvested as needed.
Thanks to its high-starch content, cassava is also an excellent source of ethanol. As the technology for converting it to fuel improves, many countries -- including China, Nigeria, and Thailand -- are considering using more of the crop to that end. If peasant farmers in developing countries could become suppliers for the emerging industry, they would benefit from the increased income. But the history of industrial demand for agricultural crops in these countries suggests that large producers will be the main beneficiaries. The likely result of a boom in cassava-based ethanol production is that an increasing number of poor people will struggle even more to feed themselves.
Participants in the 1996 World Food Summit set out to cut the number of chronically hungry people in the world -- people who do not eat enough calories regularly to be healthy and active -- from 823 million in 1990 to about 400 million by 2015. The Millennium Development Goals established by the United Nations in 2000 vowed to halve the proportion of the world's chronically underfed population from 16 percent in 1990 to eight percent in 2015. Realistically, however, resorting to biofuels is likely to exacerbate world hunger. Several studies by economists at the World Bank and elsewhere suggest that caloric consumption among the world's poor declines by about half of one percent whenever the average prices of all major food staples increase by one percent. When one staple becomes more expensive, people try to replace it with a cheaper one, but if the prices of nearly all staples go up, they are left with no alternative.
In a study of global food security we conducted in 2003, we projected that given the rates of economic and population growth, the number of hungry people throughout the world would decline by 23 percent, to about 625 million, by 2025, so long as agricultural productivity improved enough to keep the relative price of food constant. But if, all other things being equal, the prices of staple foods increased because of demand for biofuels, as the ifpri projections suggest they will, the number of food-insecure people in the world would rise by over 16 million for every percentage increase in the real prices of staple foods. That means that 1.2 billion people could be chronically hungry by 2025 -- 600 million more than previously predicted.
The world's poorest people already spend 50 to 80 percent of their total household income on food. For the many among them who are landless laborers or rural subsistence farmers, large increases in the prices of staple foods will mean malnutrition and hunger. Some of them will tumble over the edge of subsistence into outright starvation, and many more will die from a multitude of hunger-related diseases.
THE GRASS IS GREENER
And for what? Limited environmental benefits at best. Although it is important to think of ways to develop renewable energy, one should also carefully examine the eager claims that biofuels are "green." Ethanol and biodiesel are often viewed as environmentally friendly because they are plant-based rather than petroleum-based. In fact, even if the entire corn crop in the United States were used to make ethanol, that fuel would replace only 12 percent of current U.S. gasoline use. Thinking of ethanol as a green alternative to fossil fuels reinforces the chimera of energy independence and of decoupling the interests of the United States from an increasingly troubled Middle East.
Should corn and soybeans be used as fuel crops at all? 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. In the United States, corn and soybeans are typically planted in rotation, because soybeans add nitrogen to the soil, which corn needs to grow. But as corn increasingly displaces soybeans as a main source of ethanol, it will be cropped continuously, which will require major increases in nitrogen fertilizer and aggravate the nitrogen runoff problem.
Nor is corn-based ethanol very fuel efficient. Debates over the "net energy balance" of biofuels and gasoline -- the ratio between the energy they produce and the energy needed to produce them -- have raged for decades. For now, corn-based ethanol appears to be favored over gasoline, and biodiesel over petroleum diesel -- but not by much. Scientists at the Argonne National Laboratory and the National Renewable Energy Laboratory have calculated that the net energy ratio of gasoline is 0.81, a result that implies an input larger than the output. Corn-based ethanol has a ratio that ranges between 1.25 and 1.35, which is better than breaking even. Petroleum diesel has an energy ratio of 0.83, compared with that of biodiesel made from soybean oil, which ranges from 1.93 to 3.21. (Biodiesel produced from other fats and oils, such as restaurant grease, may be more energy efficient.)
Similar results emerge when biofuels are compared with gasoline using other indices of environmental impact, such as greenhouse gas emissions. The full cycle of the production and use of corn-based ethanol releases less greenhouse gases than does that of gasoline, but only by 12 to 26 percent. The production and use of biodiesel emits 41 to 78 percent less such gases than do the production and use of petroleum-based diesel fuels.
Another point of comparison is greenhouse gas emissions per mile driven, which takes account of relative fuel efficiency. Using gasoline blends with 10 percent corn-based ethanol instead of pure gasoline lowers emissions by 2 percent. If the blend is 85 percent ethanol (which only flexible-fuel vehicles can run on), greenhouse gas emissions fall further: by 23 percent if the ethanol is corn-based and by 64 percent if it is cellulose-based. Likewise, diesel containing 2 percent biodiesel emits 1.6 percent less greenhouse gases than does petroleum diesel, whereas blends with 20 percent biodiesel emit 16 percent less, and pure biodiesel (also for use only in special vehicles) emits 78 percent less. On the other hand, biodiesel can increase emissions of nitrogen oxide, which contributes to air pollution. In short, the "green" virtues of ethanol and biodiesel are modest when these fuels are made from corn and soybeans, which are energy-intensive, highly polluting row crops.
The benefits of biofuels are greater when plants other than corn or oils from sources other than soybeans are used. Ethanol made entirely from cellulose (which is found in trees, grasses, and other plants) has an energy ratio between 5 and 6 and emits 82 to 85 percent less greenhouse gases than does gasoline. As corn grows scarcer and more expensive, many are betting that the ethanol industry will increasingly turn to grasses, trees, and residues from field crops, such as wheat and rice straw and cornstalks. Grasses and trees can be grown on land poorly suited to food crops or in climates hostile to corn and soybeans. Recent breakthroughs in enzyme and gasification technologies have made it easier to break down cellulose in woody plants and straw. field experiments suggest that grassland perennials could become a promising source of biofuel in the future.
For now, however, the costs of harvesting, transporting, and converting such plant matters are high, which means that cellulose-based ethanol is not yet commercially viable when compared with the economies of scale of current corn-based production. One ethanol-plant manager in the Midwest has calculated that fueling an ethanol plant with switchgrass, a much-discussed alternative, would require delivering a semitrailer truckload of the grass every six minutes, 24 hours a day. The logistical difficulties and the costs of converting cellulose into fuel, combined with the subsidies and politics currently favoring the use of corn and soybeans, make it unrealistic to expect cellulose-based ethanol to become a solution within the next decade. Until it is, relying more on sugar cane to produce ethanol in tropical countries would be more efficient than using corn and would not involve using a staple food.
The future can be brighter if the right steps are taken now. Limiting U.S. dependence on fossil fuels requires a comprehensive energy-conservation program. Rather than promoting more mandates, tax breaks, and subsidies for biofuels, the U.S. government should make a major commitment to substantially increasing energy efficiency in vehicles, homes, and factories; promoting alternative sources of energy, such as solar and wind power; and investing in research to improve agricultural productivity and raise the efficiency of fuels derived from cellulose. Washington's fixation on corn-based ethanol has distorted the national agenda and diverted its attention from developing a broad and balanced strategy. In March, the U.S. Energy Department announced that it would invest up to $385 million in six biorefineries designed to convert cellulose into ethanol. That is a promising step in the right direction.
Wednesday, April 04, 2007
Sunday, April 01, 2007
TITANIC
http://money.cnn.com/2007/03/30/news/economy/china_trade/index.htm Well, is this just for show? with NO real bite to it? They hold a $$trillion hammer over our head.
Now maybe I'm DAFT? but how does TRADE TARRIFS benefit anyone? (many think tarrifs helped create 1st depression) in my case? It IS the same stupid?? US companies of whom are BUYING all this crap, some US companies like DMI and MARTIN NO longer have much in way of factories and import almost ALL of what they sell under their name. A TARRIF will not help them nor me? because these same US companies have NO interest in investing in plant and equipment to build these things.....when someone else can do it for them CHEAPER. And the quality of some of it is EXCEPTIONAL. Now raising tarrifs would make ALL of these goods and MOST of what we buy much higher fueling inflation!
I WOULD LOVE to buy AMERICAN and do when I can, but they don't seem interested in making what we need. INTC is building a $2.5 B plant in China, the unwinding of the Ponzi scheme FED recklessness that has created the shitpile we are getting stormed under cannot end well. While we print money to pay for the ongoing war of which I guess wont find its way into any published budget....wouldnt it be nice to have that extra $100 B or so?
AT some point (next election?) something has to give....taxes must go up, how else can we hope to pay for the $70 Trillion IOU? I Just thought of something sickening.....JUST the INTEREST on our debt must be a mind blower....and a huge SUCK to any REAL economy.
Sub prime is TIP of iceberg, it seems to me not many have been scared.....or even know the Titanic has been hit....
Duratek
Now maybe I'm DAFT? but how does TRADE TARRIFS benefit anyone? (many think tarrifs helped create 1st depression) in my case? It IS the same stupid?? US companies of whom are BUYING all this crap, some US companies like DMI and MARTIN NO longer have much in way of factories and import almost ALL of what they sell under their name. A TARRIF will not help them nor me? because these same US companies have NO interest in investing in plant and equipment to build these things.....when someone else can do it for them CHEAPER. And the quality of some of it is EXCEPTIONAL. Now raising tarrifs would make ALL of these goods and MOST of what we buy much higher fueling inflation!
I WOULD LOVE to buy AMERICAN and do when I can, but they don't seem interested in making what we need. INTC is building a $2.5 B plant in China, the unwinding of the Ponzi scheme FED recklessness that has created the shitpile we are getting stormed under cannot end well. While we print money to pay for the ongoing war of which I guess wont find its way into any published budget....wouldnt it be nice to have that extra $100 B or so?
AT some point (next election?) something has to give....taxes must go up, how else can we hope to pay for the $70 Trillion IOU? I Just thought of something sickening.....JUST the INTEREST on our debt must be a mind blower....and a huge SUCK to any REAL economy.
Sub prime is TIP of iceberg, it seems to me not many have been scared.....or even know the Titanic has been hit....
Duratek
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