Saturday, February 23, 2008

Unintended Consequences

I 'm sure most of you are aware of the increasing cost of your favorite beer. And some of you are probably aware that this increase is being at least partly blamed on ethanol subsidies. Well now the unintended consequences of government interference in the market is affecting almost all food costs. [Environment News Service]

The world is facing the most severe food price inflation in history as grain and soybean prices climb to all-time highs. Wheat trading on the Chicago Board of Trade on December 17th breached the $10 per bushel level for the first time ever. In mid-January, corn was trading over $5 per bushel, close to its historic high. And on January 11th, soybeans traded at $13.42 per bushel, the highest price ever recorded. All these prices are double those of a year or two ago.

And its not just affecting your budget, in some parts of the world a small increase in the cost of food can equal death.

The World Bank reports that for each 1 percent rise in food prices, caloric intake among the poor drops 0.5 percent. Millions of those living on the lower rungs of the global economic ladder, people who are barely hanging on, will lose their grip and begin to fall off.

So who is responsible for this perversion of basic economics, why it's our fearless leaders in D.C. And their corporate whores buddies. [U.S. News & World Report]

The federal government gives preferential treatment to domestic, corn-based ethanol in the form of a 54-cent-per-gallon tax on imported ethanol, which largely affects Brazilian producers of ethanol from sugar cane. That tax comes on top of a 51-cent exemption from the federal excise tax on gasoline that goes to fuel mixed with ethanol.

These subsidies raise the demand for domestic ethanol. That drives up the price of not only the corn used to produce the ethanol but also of wheat and soybeans, which farmers plant less of because they switch to corn. That, in turn, translates into a scarcer supply—and higher prices.

While corn-as-fuel might have started out as the bright idea of some hippy who wanted to stop greenhouse gases it was large corporate bribes that created the current situation. []

The ethanol explosion began in the 1970's and 1980's, when ADM's chief executive, Dwayne O. Andreas, was a generous campaign contributor and well-known figure in the halls of Congress who helped push the idea of transforming corn into fuel.

For those of you who vote, McCain seems to be the anti-ethanol choice, at least for now. [Bioenergy Business]

While supporting wider use of biofuels, McCain is opposed to subsidies for ethanol production – a stance which may have cost him a victory last month in the state of Iowa, which is a leading US producer of ethanol and its main US feedstock, maize (corn). Rather, he thinks that there should be a broader mix of sources for biofuel production beyond maize, such as sugar cane and switchgrass.

I'm guessing that higher beer and food prices are here to stay for the foreseeable future. The hop shortage will clear up in a couple of years, but the unintended consequences of the government's abuse of power will take decades to overcome.

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