US the blind policy giant puts farmers before food  

Posted by Big Gav in , , ,

Michael Pascoe has an interesting rant in The Age about the G20 and American corn ethanol policies and their impact on global food prices ("willfully burning food is a particular form of obscenity") - US the blind policy giant puts farmers before food.

For a little while there, in the eye of the global financial crisis, it looked like necessity would force the world's leaders into genuine international policy advances. The further we have retreated from the precipice of immediate disaster, the more useless the G20 becomes.

The platitude of the weekend was concern about food prices. For some governments, it's a very genuine concern. For all the nice talk about the appeal of democracy, the escalating price of basic foodstuffs was a bigger factor in Egyptian regime change.

So there was plenty of talk about food prices, with G20 types from the French to the Indians wanting to do something about evil speculators who must be behind the jump in soft commodities. Nice to have a convenient and simple scapegoat for a very complex problem.

The American scapegoat of choice though is China's foreign exchange policy. While the United States' dipsy and inefficient biofuels policy means it is literally burning somewhere between a third and 40 per cent of its massive corn crop as a gift to its farm lobby, Washington wants everyone to focus on the renminbi. ...

The US Treasury Secretary, little Timmy Geithner, used the Paris meeting to demonstrate again that he's as bad as his predecessors. He would have us believe that the cheap RMB means China is growing too fast and that's what's causing food inflation.

Economic growth, a nation of more than 1.3 billion people forging a way out of poverty, does result in increased food consumption, among other things. Effectively, if only more people ate less, were happy to starve for the greater good, food would be cheaper. And this sort of suggestion from the Treasury Secretary of the world's most obese nation.

The US trashing its own dollar has had a much bigger impact on prices as the greenback happens to be the world's currency of trade. And then there's the ethanol policy.

Everyone knows the US has a real estate problem with crashing house prices and shopping centre and office block owners in Chapter 11. What the US also has is a boom in farm prices that's in danger of becoming a bubble. ...

The big driver for US grain farmers has been biofuels policy that effectively links the price of corn to the price of oil while absorbing $US7.7 billion a year in government subsidies.

And the bad news is that it's early days yet. As told in a Goldman Sachs report the current US production of more than 10 billion gallons a year (nearly 9 per cent of America's gasoline supply) is slated to increase to 36 billion gallons by 2022 under the Renewable Fuels Standard of the Energy Independence and Security Act introduced in 2007. And it could get worse:

“Lately there has been a push for raising the ethanol-gasoline blending requirements from 10 per cent all the way to 15 per cent and we would not be surprised if the EPA agrees to something closer to 11-12 per cent. Each percentage increase in ethanol blending is equal to 550 million bushels of corn or approximately the equivalent of 4.5 per cent of total US production.”

There's a lot more to higher global grain prices than just the US preoccupation with gas-guzzling cars and subsidising farmers. Drought in China, floods in Australia, fires in Russia, more people wanting more food, they all play a role. But while natural disasters and human hunger happen, willfully burning food is a particular form of obscenity.

What's more, American corn isn't even an efficient source of ethanol. The scale and productivity of Brazilian sugar cane plantations perhaps makes a case for turning that sweet giant grass into fuel – but tariffs and tax subsidies for the locals keep it out of the US. American corn farmers can't begin to compete with it.

With oil prices back up around $US100 a barrel, there's increased incentive to grow more corn and thus more is being planted at the expense of other crops. Such is the totally interrelated nature of the world economy that dumb US agricultural policy plays a roll in changing third-world governments and improving the lot of Australian wheat farmers as they face less competition from the US.

Meanwhile, China is getting on with it. China has lent more money than the World Bank to developing nations over the past two years – no doubt for its own pragmatic reasons. For all the concentration on China's surplus with the US, it trades much more with its fellow developing nations. On the food front, the very necessary main growth in global food production has to come from developing nations.

And India, in a very different way, also is getting on with it. According to figures included in the latest Australian Bureau of Statistics demographics report, India's population will increase from 1173 million people in 2010 to 1657 million in 2050 – roughly half a billion extra mouths to feed in 40 years.

I somehow doubt that problem is going to be solved by a more expensive renminbi.

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