The Injustices From Biofuel Mandates

Here is an example of environmentalist flimflam.

Lester Brown of Earth Policy writes,

``The emerging competition between the owners of the world’s 910 million automobiles and the 2 billion poorest people is taking the world into uncharted territory. Suddenly the world is facing an epic moral and political issue: Should grain be used to fuel cars or feed people? The average income of the world’s automobile owners is roughly $30,000 a year; the 2 billion poorest people earn on average less than $3,000 a year. The market says, let’s fuel the cars."

While we agree that ethanol mandates are highly distortive, to blame the markets for such framed "injustice" is totally outlandish or is simply absurd for the simple reason that governments and NOT markets have been responsible for this.

This is a case of twisting facts to fit a theory or begging the question.

First of all, nearly ALL global oil reserves have been under the control by governments or are held by state owned oil companies, where only a few percentage have been opened to private companies.

This means that the pricing for world oil markets have been influenced mostly from political considerations or reflects on the consequences of the political environment rather than actual changes in demand and supply balance.

Next, global agricultural markets have been highly protected...

The average tariffs for global agricultural products are nearly double compared to non-agricultural products (charts from ers.usda.gov or US Department of Agriculture).

And the result of this "protectionism" has been a significant lag in the growth of world trade of agricultural products relative to non-agriculture products.

Nevertheless, despite the politically instituted walls or barriers, there still have been some improvements in global trading activities. The Amber waves-USDA notes (bold highlights mine),

"Improvements in transportation and handling, such as containerization and refrigeration, have facilitated shipments of out-of-season produce from distant origins, something not possible 20 years earlier. Communication and logistical improvements have enabled shippers of bulk agricultural commodities, like grains, to respond more easily to market demands for specific types, grades, and qualities. Greater purchasing power among developing countries, which tend to spend a higher share of increased income on food, has also contributed to growth in agricultural trade. These developments have been complemented in recent years by the reductions in barriers to agricultural trade brought about through the Uruguay Round Agreement on Agriculture as well as through bilateral and regional agreements."

In other words, the improvements in the marketplace has allowed this growth to happen, in spite of the influences of the non-market politically imposed protectionist measures.

Then, there is a huge $20 billion in subsidies extended to the agricultural sector via the US Farm Bill (wikipedia.org), where such subsidies exhibits market pricing based on political accommodation to select industries than from market forces.

Yet such political subsidies hasn't been directed to alleviate the plight of the "poor" but to the select elite sector...

According to Brian Riedl of the Heritage Foundation, ``With agricultural programs designed to target large and profitable farms rather than family farmers, it should come as no surprise that farm subsidies in 2001were distributed overwhelmingly to large growers and agribusiness, including a number of Fortune 500 companies."

And strong lobby from these groups have successfully forestalled any attempts to alter current policies or waive the "unjust" political economic structure. According to the latest news from AP, (bold highlights mine)

``Lawmakers crafting a sweeping farm bill in 2008 promised it would cut government payments to wealthy farmers. Two years later, little appears to have changed.

``Data being made public Wednesday shows that the wealthiest farmers in the country are still receiving the bulk of government cash, despite claims from lawmakers that reforms in the bill would put more money in the hands of smaller farms. At the same time, a series of exemptions written into the bill has made it more difficult for the public to find out who is receiving what.

``Lawmakers writing the $290 billion bill included several provisions aimed at cutting down on government subsidies to the wealthiest farmers. They sought to eliminate a loophole that allowed farmers to collect higher payments and they set income limits for those who received subsidies. Though those new laws may have cut down on payments to some farmers, others have been able to find ways around them.

``Such subsidies to the nation's largest farms are a mainstay of congressional politics and an eternal frustration to those who want to eliminate them. A powerful coalition of farm-state members of Congress have successfully defended their constituents' interests in farm bill after farm bill."

Of course we can't ignore that the key beneficiaries of the biofuel subsidies/mandates have been basically the same groups...

From Heritage's Ben Lieberman,

``Overall, the costs of the ethanol mandate are substantial, while the benefits are small at best. The only real winners are the direct beneficiaries of this special-interest program, mainly corn farmers and ethanol producers."

So, politics and not the markets, have played as the most important contributor to the "injustices" wrought by the so-called imbalances.

Finally, Mr. Lester tries to associate some cause and effects to the actions of the oil market with that of grain market.

He says, ``The price of grain is now tied to the price of oil. Historically the food and energy economies were separate, but now with the massive U.S. capacity to convert grain into ethanol, that is changing. In this new situation, when the price of oil climbs, the world price of grain moves up toward its oil-equivalent value. If the fuel value of grain exceeds its food value, the market will simply move the commodity into the energy economy. If the price of oil jumps to $100 a barrel, the price of grain will follow it upward. If oil goes to $200, grain will follow."

While oil (WTIC-behind), grain (DJ-UBS grains) and most commodities as signified by the CRB (lower window) have moved in tandem during the commodity heydays of 2008, this relationship does not hold true today.

So the alleged correlation isn't clear.

Moreover, such assertion excludes the critical role played by the US Federal Reserve in blowing the housing bubble which apparently percolated into the commodity markets.

Bottom line: since most of today's imbalances have been due to skewed laws, regulations and political actions, the answer isn't more mandates but to allow market forces to work.