The Broader Risk: Exploring the International Ramifications of American Corn-Ethanol Policy

0:00My name is Luca Hickman, and today I'm going to be discussing the broader risks of our corn ethanol policy. And I must confess, I think they didn't really know where to put me, so they just sort of shoved me in this group. But I assure you, if you just give me your attention, I can tell you some things that are going to be very interesting and also very upsetting. First, I want to give you a topical preview. The first thing we're going to talk about is egg-flation, and I'm going to define that in just a moment. Then we're going to ask the question, what is ethanol? Then we're going to talk about something called the food versus fuel debate. And this is something that's very, very important and very, very timely when you're discussing ethanol policy. Then we're going to talk about riots and demonstrations, and you'll understand that a little better in a few moments.

0:46And then I'm going to make some predictions, and I won't give you any dates or numbers, don't worry. But first, I want to just give you some background about who I am, Who I am, how am I qualified to speak? I'm actually not an economist, I'm an engineering student. And that gives me a perspective about a policy like alternative energy policy that's a little bit different than you might expect from an Austrian Scholars Conference. I began studying this in mid-2007, so I've been doing this for several years, and I've written a book called The Ethanol Myths and this presentation is an adaptation of portions of this work. And I would also say that my interest in Austrian economics was first started when I heard Ron Paul talking about it when he ran for president. And so I'm sort of new to this school but the more I learn the more I am enjoying myself here. So I thank you for welcoming me into this group.

1:45Now, agflation defined. The first thing we have to do is say, what is this word? It is It is inflationary pressure induced throughout the macroeconomy by rising agricultural commodity prices. That is what I mean by agflation. Now, it's dramatic and has far-reaching effects. If you think when oil prices go up, it makes a difference for everybody. Think about food. Everyone needs to eat. And if food prices go up 5%, what does that do? Well, what happens when they go up 50%? It's capable of severely damaging an economy's natural balance. Once you make food significantly more expensive, the entire machinations of the economy can fall apart. Now, you might think I'm being a bit overdramatic, and perhaps I am for the United States, but as soon as you get out into the world and you start getting into nations where food will take up 50% of the budget at normal prices for an individual, what is a doubling or tripling So now, who here has heard of the law of supply and demand? No hands, really.

2:55I want to give you guys a little quiz because I'm sure you're all familiar. This is a price chart. We have a commodity, commodity X, and we have time. Now, I want to ask, why is price up? Now, A, supply increased, B, the supply decreased, C, demand increased, or D, another bailout package just eroded the value of the dollar even more. Now this is very subjective, right, it could be several things. Supply could have decreased, demand could have increased, and quite frankly, Mr. Bernanke could have had his way again, but I think we can all see that supply and demand would Now here's a second little quiz. Here is a graph of the acres of a commodity planted in millions in time. We can see a very big shift here. What will this do to price? A, price will increase. B, price will decrease. Or C, another bailout package just wrote the I'm not sure if this has anything to do with prices, but I'm pretty sure that's going to happen as well.

4:11Price will decrease, bailout package will pass, but we can say that price will not increase. But you know what's interesting? These graphs are actually for the same commodity, and this is actually real data. This is the price of corn, and this is the amount of acres planted in the United States in corn. So as we see here, when corn prices went from about $2 to about $6, the supply did this. Why? It has to be a rapid and very, very powerful change in demand. This is the only thing that explains this. And I want to tell you this, this is not isolated. This is a price for flour. This is a price for rice, uncooked rice. This is the price for chicken. What is this? Milk.

5:03I've got plenty of these, don't worry. Frozen turkey. Now you can see the turkey is always cyclical, right? Around November the price plunges. You can see the trend is clearly upwards. Beef. Why? This is not just corn. This is not just flour, not just rice. This is food. Food is increasing dramatically in price. Now, we know, at least for corn and for other crops as well, that a changing supply is not really the problem. Supply is going up. So we can say it's caused by change in demand. We also know it's widespread and massive, and this is really unprecedented. Unless you're going to get back into biblical days with Joseph in Egypt, I don't think we've seen price increases in grains like this.

5:51this we really have and I think we can safely say that something is causing this it's really external to the market ie it's not a business it's not a group of people I think it's the government and I'm very very confident in my saying that American corn ethanol policy is really to blame for a lot of this so we talked about agflation now I want to talk about what is ethanol because most Most of us here are economists, we're not necessarily familiar with what ethanol is, it's a chemical, it's an energy, let's talk about that. Ethanol is also known as grain alcohol. So basically you take a corn-based mash, here in the United States, and you ferment it like you would to make whiskey, and then you burn it in your car.

6:37Pretty simple, right? And this here is a picture of an ethanol refinery and the reason I included this is You wouldn't believe how many people think it's of some sort of still in grandpa's backyard This is massive business ladies and gentlemen

6:59Ethanol industry support I don't have a problem with ethanol, I really don't. If a private corporation wants to manufacture ethanol because the market wants it Let them. I think we're in agreeance, we like the market here. My problem is that the government is supporting this and my problem is that without that support, I guarantee you this industry would not exist. So they get a 51 cent per gallon subsidy. That means if you make one gallon of ethanol, the federal government will give you 51 cents. If you make one billion gallons of ethanol, the The government will give you $0.51 times $1 billion. $0.54 per gallon tariff. See, in Brazil and in other countries, they can make ethanol a lot cheaper than we can here.

7:45So what does the government do? They put a tariff on it, of course. Make it so that it's uncompetitive. And then, of course, we have the mandates. Millions and millions and millions of gallons of this fuel are mandated for usage in the United States. We have an industry where their competitors are non-existent, they get support from the government, and then the government tells us we have to use their product. I think for being in engineering, I'm in the wrong business. So this is a pie chart about alternative fuel funding. These are the two biggest fuels in the United States, alternative speaking, ethanol and biodiesel. Corn ethanol is this one. It receives 79% of the government funding.

8:33Now, I could have talked about biofuels, but that's such a large topic, I said, let's go right to the source. Let's talk about ethanol. It is clearly the focus of the government. There's an average, folks, of $6.3 to $8.7 billion per year, from 2006 to 2012, this is predicted, that will be given to the ethanol industry in this country. And since 1996, they've received 30 billion of your dollars. Do you understand why I'm getting a little upset and I can probably flush in the face and everything? Now who supports ethanol? I think we need to understand. I've got some people laughing already. I think we have to ask ourselves, why is this being supported? Who's pushing this through?

9:22So let's ask, oh okay, ethanol reduces our dependence on foreign sources of oil and is an important weapon in the war on terror. By investing in South Dakota's ethanol producers, we will strengthen our energy security and create new jobs. U.S. Senator Thune. But we must take other steps, such as increasing conservation, developing an ethanol industry, etc. Congressman Bobby Jindal, I saw him on the news recently, he's apparently the poster We should increase our development of alternative fuels, taking advantage of renewable resources like using corn and sugar to produce ethanol. This is not a one-party issue, this is very, very much bipartisan, very much.

10:07By furthering the use of ethanol, farmers are presented with the opportunity to produce a cash crop by collecting their agricultural wastes. Dick Lugar, I didn't realize corn was an agricultural waste. Did anyone else notice this? I thought it was a fool. Not according to Senator Lugar. Everything about ethanol is good, good, good. Senator Grass, you know, we can just stop here. It's good. American farmers, by making the commitment to grow more corn for ethanol, are at the tip of the spear and the War Against Terrorism. This man was the former head, the former head of the CIA. The CIA is telling us that if we just grow more corn, we'll be safe.

10:57I don't know why they don't invest in fields, but okay. And then I got a nice little video here. I'm not sure if the volume will be sufficient. You can hear.

11:12Oh, okay, okay. Well anyway, well it was President Bush who stated the Union Address in 2006 and basically what he says is we need lots of ethanol. We need ethanol because it's going to make it safer, it's green fuel, it's going to all these promises. And it's interesting that if you remember those price charts I showed earlier, when did prices start going up? About 2006. When did the supply of corn skyrocket? Why did we have the largest corn harvest in history? 2007, the next year. I'm sure it was just a coincidence, right? So we've talked about agglutination, we've talked about what is ethanol. Now we have to get to the meat of my presentation today, food versus fuel.

11:58I would like to show you a comic, just take a second and take a look. The caption says, your child is hungry, my SUV is ravenous. I can't help you and it's it's sort of humorous but when you think about it it's also very sad and upsetting because this is what I'm talking about there is a finite supply of food you can grow it year to year you can plant more of something but two there's a finite amount of irritable land and the question is when you're converting our food into fuel and then burning it what is that doing to people around the world that are poor. Now this is ethanol production capacity by year, 1999, 2000, going, going, going, starts going up quite rapidly. Now this is the total number of ethanol plants by year, also going up, but that's not really a very good indication of what's going on on the month to month a year by year, because it takes time to build ethanol plants. If you really want to understand how the

13:07government's support for this industry has been growing, we need to look at the number of new plants being constructed and the number of existing plants increasing their capacity, expanding their facilities. Uh-oh, that's this. So we've got President Bush's speech here, boom, the next year. And we're already seeing problems with this. What happens when these plants start coming online soon? What happens when they start reaching their full capacity? Now this is an interesting chart. This is where we put the existing capacity next to what they're adding on here from these plants.

13:53You can see here that the blue is the existing capacity, the black is what they're adding on right now. So if the 2008 numbers really aren't in yet, but if you just kind of add that on top of it. Do you see the problem? Do you understand the scope of this? Now let's put this in human terms. 510 pounds of corn are required to make 13 gallons of ethanol. 510 pounds of corn. Well, put it in human terms, that's enough to feed a starving child for a year, in any one of a number of countries. Now you might say, well, Luca, this is field corn, not sweet corn. Do you think farmers who are usually planting sweet corn might switch over to field corn?

14:43Do you think if they weren't growing so much field corn, maybe they'd plant sweet corn? I mean, after all, isn't the equipment the same? The same tractors, the same processes? And so I made this graph here. This is ethanol capability in millions of tons of food. We can talk about gallons of ethanol, but if you actually want to talk about it in human terms, this is how many millions of tons of food we're burning every year. To put it simply, there's a finite amount of irritable land. We understand that. In 2008, ethanol consumed a full third of America's corn harvest. A third of it. And substitute goods and production displacement, remember production displacement, if you're growing corn on this acre of land, you can't grow wheat there.

15:38These are causing a dramatic shift from corn demand to trickle into other commodities. Why is the price of wheat going up? Because farmers are planting more corn and less wheat. As a whole, the result is that food prices rise enormously. So we've talked about agflation, we've talked about what is ethanol, and we've talked about this food versus fuel debate. Now I want to move into something interesting called riots and demonstrations. Two quotes first. We heard, you heard from Aristotle this morning, poverty is the parent of revolution and crime. Just think about that. Poverty is the parent of revolution and crime. And then I had to throw in another fine gentleman, because I knew he would be underrepresented here, Vladimir Lenin. A revolution is impossible without a revolutionary situation.

16:31If there is one area I would count on Lenin to understand, it's how to overthrow a government. And that's about it. A revolution is impossible without a revolutionary situation. If the price of food goes up enough, do you think that might cause a revolutionary situation? Wasn't there something in the French Revolution about, let them eat cake, they couldn't afford bread? Wasn't there something about this peasant revolt that Lenin was the head of about not So what is the broader risk? The U.S. is the world's biggest grain exporter. We export more grain than Canada, Australia and Argentina combined.

17:23In fact, Iowa alone harvests more corn than all of Canada, and we just took a third of our crop and burned it. So when we're the number one exporter of grain in the world, what starts to happen when that grain goes away? The broader risk. Let me tell you something else. Did you know that more than 20 nations have corn-based diets? Did you know that? More than 20 nations. Corn is their staple crop, and we're burning it. I'm sure that won't... Mexico. Mexico's an example. I believe the average Mexican gets 40% of his or her daily protein intake from corn-based products.

18:13To tortillas. No, well that's why 75,000 people demonstrated in Mexico City when the price of tortillas rose 400 percent. This is real, this is what I'm talking about. The broader risk is very, very crucial to understand from a policy perspective as well as from an international relations perspective. And many of these countries, like Mexico, they're impoverished and they're politically unstable. This is a great cover from The Economist, it's called The Silent Tsunami, The Food Crisis and How to Solve It. Now I'm not sure they got it completely right but they did identify our ethanol policy as a very big problem. But the thing about this cover I don't like is silent. It's not. There have been riots, demonstrations and protests in Egypt. I'm sure these police are just escorting this gentleman somewhere. Burkini Faso, Haiti. In fact, this is the first time This is the first time in the 21st century that a government collapsed because of food.

19:38They kicked the president out of office. First time. Bangladesh, Senegal. In fact, in the past two to three years, food riots have erupted in more than 20 nations. There have been everything from the tortilla crisis in Mexico to pasta protests in Italy, people protesting all over the world. Here's a great map. See these countries in red? These have been places where you've had food protests or food riots or food-related demonstrations in the past two or three years. This is a burgeoning threat. This is the beginning. If you remember our ethanol capability graph from earlier, you'll see that the potential for more and more ethanol is only growing.

20:25As this happens, what happens to these nations? We're going to see a lot more red? So lastly, before I leave, I want to just take a look into the future just a little bit. Try and understand where we might be heading with this situation. I think that unless something changes, we're going to see greater subsidies. Now, you say we're giving tens of billions of dollars. You think there are going to be more subsidies? Absolutely. Absolutely, I do. I think there's going to be greater mandates. We've had cases already where governors have asked the EPA to waive mandates Because of what it's doing to the agricultural sectors in their states. What am I talking about? Take Texas, ranching country.

21:14What happens when the price of corn goes up? Can ranchers still feed their cattle? Governor of Texas asked the EPA to waive mandates. EPA said no. There's going to be more. Prolonged tariffs. The tariffs we have on imported ethanol will eventually expire. They're going to be prolonged. And here's a wonderful video, and I really, I see there's an image, so I'm hoping it's going to work. This is our new president, and it's a series of clips about his position on ethanol, just because I wanted to be an equal opportunity offender here. And I think you'll agree that the future doesn't really look that good if it plays, which, oh no, not another video of mishap.

22:05Okay, essentially, I watched the video several times so I think I can do this one, essentially he explained that he's from Illinois, which is a very large corn producing state, number two in the Union, behind Iowa, and he said, well naturally I'm for ethanol, it's been great in our state, right, corn farmers are loving it, you know, I'm sure that things like having Archie Daniels Midland, the world's largest ethanol producer based in your home No mistake doesn't hurt either, but I'm sure that didn't have an impact. And then that clip, I really wish it would have worked because it finished up with a woman that he's just picking to go into his cabinet talking about the need to expand ethanol production upwards of around 60 billion gallons a year.

22:51Now I don't know if these people ever ran the numbers, but they realized there's not enough corn in the United States to do that, but that doesn't matter. There's not enough corn to feed the world right now the way we're burning it, so a little less. So finally, we talked about egg flation. We understand that when prices rise in agriculture significantly, I'm not talking one to two percent, I'm talking doubling, tripling, quadrupling. When these things happen, the ramifications in our economy here are immense. We talked about what ethanol is. It's a fuel that's based from food. Now there are new ethanol being developed, cellulosic ethanol, ethanol from seaweed, from trees, I'm sure that won't hurt our forests at all, but the problem is those things have been being studied since the 70s and no one's been able to make them commercially viable yet.

23:50Not that ethanol is, I mean once you reduce, once you get away with the subsidies and the mandates you find out it can't compete either, but at least it has some glimmer of hope.

24:06When we talked about food versus fuel, we understand that when we're converting our food supply into fuel, this has some very significant ramifications in the form of riots and demonstrations. I said, we have higher food prices here And I don't want to diminish the significance of that, but let's face it, we have enough money that we're not going to necessarily starve to death as a nation. But we've already seen riots and demonstrations all over the world, and let's ask ourselves. We're giving billions of dollars to nations like Egypt to keep them afloat, because we want them to be stable for our strategic interests. at the same time we're proposing and promoting this policy that's doing the exact opposite it's undermining their government structure what happens to our security here when a nation like Egypt collapses or when a nation like Mexico right at our border already infested with a drug war I don't think they can win what happens when their people start rioting are the police going to be able

25:14I'm not sure what the resolution to this is. I hate to end on a down note, hey guys, this is sort of a bad policy, but I'm not sure what the future will hold. Unless something changes, I can tell you that it will get worse, significantly worse. So thank you, and that says, ask questions, I guess we're going to ask questions at the end, so please hold your questions.