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.

From the "bad idea of the day" file comes this report from The Des Moines Register looking at corn that has been genetically modified to make it more suitable for biofuel production (and less suitable for human consumption) - Vilsack OKs industrial corn.

Agriculture Secretary Tom Vilsack has approved a biotech corn variety that was engineered solely for producing fuel ethanol. Companies that mill corn for breakfast cereals and other foods have been fighting the move for fear the grain will contaminate their supplies.

The corn, a product of Syngenta, contains an enzyme that reduces the cost of turning the grain into the biofuel. That same enzyme can make the corn unsuitable for some food products, including cereals and coatings on corn dogs, according to millers. But Syngenta insists that the corn will be kept away from food channels through the use of grower contracts and financial incentives and by growing it only in areas where food companies don’t procure their grain supplies.

The corn, which will go by the trade name Enogen, is to be grown this year only in western parts of Kansas and Nebraska, but Syngenta hopes to eventually offer it to areas around ethanol plants in Iowa and other states.

The Nation has an interesting look at why food prices have gone up so much in recent years. Rather than pointing the finger at biofuels or oil and fertiliser prices, the author blames the IMF, the World Bank and US and EU agricultural subsidies that destroyed a lot of developing world peasant agriculture. Lots more at the original.

When tens of thousands of people staged demonstrations in Mexico last year to protest a 60 percent increase in the price of tortillas, many analysts pointed to biofuel as the culprit. Because of US government subsidies, American farmers were devoting more and more acreage to corn for ethanol than for food, which sparked a steep rise in corn prices. The diversion of corn from tortillas to biofuel was certainly one cause of skyrocketing prices, though speculation on biofuel demand by transnational middlemen may have played a bigger role. However, an intriguing question escaped many observers: how on earth did Mexicans, who live in the land where corn was domesticated, become dependent on US imports in the first place?

The Mexican food crisis cannot be fully understood without taking into account the fact that in the years preceding the tortilla crisis, the homeland of corn had been converted to a corn-importing economy by "free market" policies promoted by the International Monetary Fund (IMF), the World Bank and Washington. The process began with the early 1980s debt crisis. One of the two largest developing-country debtors, Mexico was forced to beg for money from the Bank and IMF to service its debt to international commercial banks. The quid pro quo for a multibillion-dollar bailout was what a member of the World Bank executive board described as "unprecedented thoroughgoing interventionism" designed to eliminate high tariffs, state regulations and government support institutions, which neoliberal doctrine identified as barriers to economic efficiency.

Interest payments rose from 19 percent of total government expenditures in 1982 to 57 percent in 1988, while capital expenditures dropped from an already low 19.3 percent to 4.4 percent. The contraction of government spending translated into the dismantling of state credit, government-subsidized agricultural inputs, price supports, state marketing boards and extension services. Unilateral liberalization of agricultural trade pushed by the IMF and World Bank also contributed to the destabilization of peasant producers.

This blow to peasant agriculture was followed by an even larger one in 1994, when the North American Free Trade Agreement went into effect. Although NAFTA had a fifteen-year phaseout of tariff protection for agricultural products, including corn, highly subsidized US corn quickly flooded in, reducing prices by half and plunging the corn sector into chronic crisis. Largely as a result of this agreement, Mexico's status as a net food importer has now been firmly established.

With the shutting down of the state marketing agency for corn, distribution of US corn imports and Mexican grain has come to be monopolized by a few transnational traders, like US-owned Cargill and partly US-owned Maseca, operating on both sides of the border. This has given them tremendous power to speculate on trade trends, so that movements in biofuel demand can be manipulated and magnified many times over. At the same time, monopoly control of domestic trade has ensured that a rise in international corn prices does not translate into significantly higher prices paid to small producers.

It has become increasingly difficult for Mexican corn farmers to avoid the fate of many of their fellow corn cultivators and other smallholders in sectors such as rice, beef, poultry and pork, who have gone under because of the advantages conferred by NAFTA on subsidized US producers. According to a 2003 Carnegie Endowment report, imports of US agricultural products threw at least 1.3 million farmers out of work--many of whom have since found their way to the United States. ...

Creating a Rice Crisis in the Philippines

That the global food crisis stems mainly from free-market restructuring of agriculture is clearer in the case of rice. Unlike corn, less than 10 percent of world rice production is traded. Moreover, there has been no diversion of rice from food consumption to biofuels. Yet this year alone, prices nearly tripled, from $380 a ton in January to more than $1,000 in April. Undoubtedly the inflation stems partly from speculation by wholesaler cartels at a time of tightening supplies. However, as with Mexico and corn, the big puzzle is why a number of formerly self-sufficient rice-consuming countries have become severely dependent on imports.

The Philippines provides a grim example of how neoliberal economic restructuring transforms a country from a net food exporter to a net food importer. The Philippines is the world's largest importer of rice. Manila's desperate effort to secure supplies at any price has become front-page news, and pictures of soldiers providing security for rice distribution in poor communities have become emblematic of the global crisis.

The broad contours of the Philippines story are similar to those of Mexico. Dictator Ferdinand Marcos was guilty of many crimes and misdeeds, including failure to follow through on land reform, but one thing he cannot be accused of is starving the agricultural sector. To head off peasant discontent, the regime provided farmers with subsidized fertilizer and seeds, launched credit plans and built rural infrastructure. When Marcos fled the country in 1986, there were 900,000 metric tons of rice in government warehouses.

Paradoxically, the next few years under the new democratic dispensation saw the gutting of government investment capacity. As in Mexico the World Bank and IMF, working on behalf of international creditors, pressured the Corazon Aquino administration to make repayment of the $26 billion foreign debt a priority. Aquino acquiesced, though she was warned by the country's top economists that the "search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one." Between 1986 and 1993 8 percent to 10 percent of GDP left the Philippines yearly in debt-service payments--roughly the same proportion as in Mexico. Interest payments as a percentage of expenditures rose from 7 percent in 1980 to 28 percent in 1994; capital expenditures plunged from 26 percent to 16 percent. In short, debt servicing became the national budgetary priority.

Spending on agriculture fell by more than half. The World Bank and its local acolytes were not worried, however, since one purpose of the belt-tightening was to get the private sector to energize the countryside. But agricultural capacity quickly eroded. Irrigation stagnated, and by the end of the 1990s only 17 percent of the Philippines' road network was paved, compared with 82 percent in Thailand and 75 percent in Malaysia. Crop yields were generally anemic, with the average rice yield way below those in China, Vietnam and Thailand, where governments actively promoted rural production. The post-Marcos agrarian reform program shriveled, deprived of funding for support services, which had been the key to successful reforms in Taiwan and South Korea. As in Mexico Filipino peasants were confronted with full-scale retreat of the state as provider of comprehensive support--a role they had come to depend on.

And the cutback in agricultural programs was followed by trade liberalization, with the Philippines' 1995 entry into the World Trade Organization having the same effect as Mexico's joining NAFTA. WTO membership required the Philippines to eliminate quotas on all agricultural imports except rice and allow a certain amount of each commodity to enter at low tariff rates. While the country was allowed to maintain a quota on rice imports, it nevertheless had to admit the equivalent of 1 to 4 percent of domestic consumption over the next ten years. In fact, because of gravely weakened production resulting from lack of state support, the government imported much more than that to make up for shortfalls. The massive imports depressed the price of rice, discouraging farmers and keeping growth in production at a rate far below that of the country's two top suppliers, Thailand and Vietnam.

The consequences of the Philippines' joining the WTO barreled through the rest of its agriculture like a super-typhoon. Swamped by cheap corn imports--much of it subsidized US grain--farmers reduced land devoted to corn from 3.1 million hectares in 1993 to 2.5 million in 2000. Massive importation of chicken parts nearly killed that industry, while surges in imports destabilized the poultry, hog and vegetable industries. ...

The experience of Mexico and the Philippines was paralleled in one country after another subjected to the ministrations of the IMF and the WTO. A study of fourteen countries by the UN's Food and Agricultural Organization found that the levels of food imports in 1995-98 exceeded those in 1990-94. This was not surprising, since one of the main goals of the WTO's Agreement on Agriculture was to open up markets in developing countries so they could absorb surplus production in the North. As then-US Agriculture Secretary John Block put it in 1986, "The idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on US agricultural products, which are available in most cases at lower cost."

What Block did not say was that the lower cost of US products stemmed from subsidies, which became more massive with each passing year despite the fact that the WTO was supposed to phase them out. From $367 billion in 1995, the total amount of agricultural subsidies provided by developed-country governments rose to $388 billion in 2004. Since the late 1990s subsidies have accounted for 40 percent of the value of agricultural production in the European Union and 25 percent in the United States.

The apostles of the free market and the defenders of dumping may seem to be at different ends of the spectrum, but the policies they advocate are bringing about the same result: a globalized capitalist industrial agriculture. Developing countries are being integrated into a system where export-oriented production of meat and grain is dominated by large industrial farms like those run by the Thai multinational CP and where technology is continually upgraded by advances in genetic engineering from firms like Monsanto. And the elimination of tariff and nontariff barriers is facilitating a global agricultural supermarket of elite and middle-class consumers serviced by grain-trading corporations like Cargill and Archer Daniels Midland and transnational food retailers like the British-owned Tesco and the French-owned Carrefour.

There is little room for the hundreds of millions of rural and urban poor in this integrated global market. They are confined to giant suburban favelas, where they contend with food prices that are often much higher than the supermarket prices, or to rural reservations, where they are trapped in marginal agricultural activities and increasingly vulnerable to hunger. Indeed, within the same country, famine in the marginalized sector sometimes coexists with prosperity in the globalized sector.

This is not simply the erosion of national food self-sufficiency or food security but what Africanist Deborah Bryceson of Oxford calls "de-peasantization"--the phasing out of a mode of production to make the countryside a more congenial site for intensive capital accumulation. This transformation is a traumatic one for hundreds of millions of people, since peasant production is not simply an economic activity. It is an ancient way of life, a culture, which is one reason displaced or marginalized peasants in India have taken to committing suicide. In the state of Andhra Pradesh, farmer suicides rose from 233 in 1998 to 2,600 in 2002; in Maharashtra, suicides more than tripled, from 1,083 in 1995 to 3,926 in 2005. One estimate is that some 150,000 Indian farmers have taken their lives. Collapse of prices from trade liberalization and loss of control over seeds to biotech firms is part of a comprehensive problem, says global justice activist Vandana Shiva: "Under globalization, the farmer is losing her/his social, cultural, economic identity as a producer. A farmer is now a 'consumer' of costly seeds and costly chemicals sold by powerful global corporations through powerful landlords and money lenders locally." ...

In 1999 the government of Malawi initiated a program to give each smallholder family a starter pack of free fertilizers and seeds. The result was a national surplus of corn. What came after is a story that should be enshrined as a classic case study of one of the greatest blunders of neoliberal economics. The World Bank and other aid donors forced the scaling down and eventual scrapping of the program, arguing that the subsidy distorted trade. Without the free packs, output plummeted. In the meantime, the IMF insisted that the government sell off a large portion of its grain reserves to enable the food reserve agency to settle its commercial debts. The government complied. When the food crisis turned into a famine in 2001-02, there were hardly any reserves left. About 1,500 people perished. The IMF was unrepentant; in fact, it suspended its disbursements on an adjustment program on the grounds that "the parastatal sector will continue to pose risks to the successful implementation of the 2002/03 budget. Government interventions in the food and other agricultural markets... [are] crowding out more productive spending."

By the time an even worse food crisis developed in 2005, the government had had enough of World Bank/IMF stupidity. A new president reintroduced the fertilizer subsidy, enabling 2 million households to buy it at a third of the retail price and seeds at a discount. The result: bumper harvests for two years, a million-ton maize surplus and the country transformed into a supplier of corn to Southern Africa.

Malawi's defiance of the World Bank would probably have been an act of heroic but futile resistance a decade ago. The environment is different today, since structural adjustment has been discredited throughout Africa. Even some donor governments and NGOs that used to subscribe to it have distanced themselves from the Bank. Perhaps the motivation is to prevent their influence in the continent from being further eroded by association with a failed approach and unpopular institutions when Chinese aid is emerging as an alternative to World Bank, IMF and Western government aid programs.

Technology Review has an article on a really bad idea - corn that can turn itself into biofuel (the genetic engineer's approach to fermenting the food supply). I'm not really into banning things but this would appear to be a good candidate.

Its not just that the foolishness of turning food into fuel should be apparent to everyone by now - there is also what I think of as the "brown goo" problem - what happens if these genes spread more widely than expected ?

In an effort to help boost the nation's supply of biofuels, researchers have created three strains of genetically modified corn to manufacture enzymes that break down the plant's cellulose into sugars that can be fermented into ethanol. Incorporating such enzymes directly into the plants could reduce the cost of converting cellulose into biofuel.

Last year, new federal regulations called for production of renewable fuels to increase to 36 billion gallons annually--nearly five times current levels--by 2022. Today, nearly all fuel ethanol in the United States is produced from corn kernels. To meet the required increase, researchers are turning to other sources, such as cellulose, a complex carbohydrate found in all plants. Corn leaves and stems, prairie grasses, and wood chips are leading candidates for supplies of cellulose. Cellulosic ethanol has many advantages over that produced from corn kernels. Cellulose is not only extremely abundant and inexpensive; studies also suggest that the production and use of ethanol from cellulose could yield fewer greenhouse gases.

However, the biggest obstacle to making cellulosic ethanol commercially feasible is the breakdown of cellulose. Enzymes that degrade cellulose, called cellulases, are typically produced by microbes grown inside large bioreactors, an expensive and energy-intensive process. "In order to make cellulosic ethanol really competitive, we really need to bring those costs down," says Michael J. Blaylock, vice president of system development at Edenspace, a crop biotechnology firm based in Manhattan, KS.

Mariam Sticklen, professor of crop and soil science at Michigan State University, in East Lansing, figured that she could eliminate the cost of manufacturing enzymes by engineering corn plants to produce the enzymes themselves. Instead of relying on the energy-intensive process of producing them in bioreactors, "the plants use the free energy of the sun to produce the enzymes," she says. ...

To avoid the possibility of transferring the genes to other crops or wild plants, the enzymes are only produced in the plant's leaves and stems, not in its seeds, roots, or pollen, says Sticklen. What's more, to prevent the corn from digesting itself, she engineered the plants so that the enzymes accumulate only in special storage compartments inside the cells, called vacuoles. The cellulases are released only after the plant is harvested, during processing.

The Houston Chronicle reports that corn plantings in the US have dropped 7% since last year, leading to (over the top) speculation about corn rationing this year. Presumably this is related to the ethanol price bust, but no explanation is given (I guess its also possible that rising fuel and fertiliser costs are a factor). On the other hand, soy plantings have risen 18%.

A BB&T Capital Markets analyst said Monday corn rationing may be necessary this year, following a U.S. Department of Agriculture report predicting farmers would plant far fewer acres of corn in 2008.

According to the March Prospective Plantings Report, farmers intend to plant about 86 million acres of corn this year, down 8 percent from 2007, when the amount of corn planted was the highest since World War II.

Analyst Heather L. Jones said in a note to investors if the USDA estimate proves accurate, the year may produce just 200 million bushels of corn. That, she said, wouldn't be enough to meet demand, given current export and feed demand trends and higher ethanol demand. Both ethanol and animal feed are made with corn.

"That is an untenable inventory demand, in our opinion," she said. "Consequently, we believe demand must be rationed or there needs to be a big supply response from other growing regions of the world."

The plantings report caused nervousness among meat producers and food makers who spent last year struggling to offset higher corn costs. Even though acreage was high, demand for ethanol and need overseas pushed prices to record levels.

Jones said she expects corn prices to rise even more, especially if unfavorable weather damages any of the crop.

The report delivered some promising news for meat producers, who also use soybeans to make feed. Farmers estimated they will plant 74.8 million acres of soybeans, up 18 percent from 2007.

AFP has an article on the likely impact of the expanding ethanol market on the dead zone in the Gulf of Mexico.

A planned increase in US ethanol production from corn would spell environmental "disaster" for marine species in the Gulf of Mexico, said a co-author of a science study published Monday.

A boost in corn production will worsen the Gulf's so-called "dead zone," an area with so little oxygen that sealife suffocates, said Simon Donner, a geographer at the University of British Columbia in Western Canada.

"Most organisms are not able to survive without enough oxygen," Donner told AFP. "All the bottom-dwelling organisms that can't move away are probably going to die, while fish will migrate if they can."

Donner and Chris Kucharik of the University of Wisconsin used computer models to conclude that growing enough corn to meet US biofuel goals set for 2022 would cause a boost of 10 to 34 percent in nitrogen pollution in the Mississippi and Atchafalaya Rivers, which run into the Gulf of Mexico.

In turn, the study said, there will be more than a 95 percent probability of failure in American targets to reduce the Gulf dead zone.

The study is published Monday in the online Early Edition of the Proceedings of the National Journal of Sciences.

The Gulf's dead zone, first measured about three decades ago, has grown to cover an area as large as 20,000 square kilometers (12,400 square miles) each summer in the Gulf, which is ringed by the southern United States, Mexico and Cuba.

The zone is caused indirectly by nitrogen fertilizers used on cornfields in states like Illinois, Iowa, Nebraska and Wisconsin. Excess nitrogen runs into the Mississippi River, becomes nitrate, and feeds algae growth. When the algae eventually dies it sinks to the bottom and rots, a process that sucks oxygen out of the water and kills all other life forms.

A few days ago, someone here posted a link to a story about skyrocketing farmland prices in the Midwest. It really made me angry to think about the inflationary chain reaction and the vicious chain of events our politicians have set into motion with these ethanol mandates. It made me even angrier to think that the few who benefit from these policies defend their right to siphon money from the rest of us and into their pockets. (I will be the first to say that surging energy prices are a big component of surging inflation, but with the ethanol mandates we are throwing jet fuel on an already raging fire).

This all started out innocently enough. Oil prices were climbing. Our energy production was shifting to an ever greater extent to countries that are hostile to the U.S.

So, Step 1 in the chain is to propose a solution ...

Who Benefits

The primary beneficiaries are commercial corn (and other commodity) farmers who purchased their land prior to the mandates. They are truly experiencing a windfall from these policies, and thus will fight the hardest to continue down this ill-advised road. A lot of millionaires have been made in Iowa as farmland prices quadrupled.

Secondary beneficiaries are lobbyists who defend the practice, those who are willing to write papers (commissioned by the National Corn Growers Association) that shift the blame, and pandering politicians with constituents that benefit from the current policies.

Who Doesn't

The ethanol producer isn’t even consistently benefiting (unless they are also corn farmers). Ethanol producers are starting to realize that the energy business is often low margin (and cyclical), and not as lucrative as they once thought. When an overbuilding cycle occurs, prices crash. When prices crash, the call for more mandates is raised by ethanol producers who are facing financial trouble. Wash, rinse, repeat. After all, we must bail those out who make poor financial decisions. This is national security, for God's sake! If we don't bail them out with more mandates, the terrorists win. More mandates are certainly needed to rectify this.

The cattle rancher (like my Dad) and pig and poultry farmers get hurt from higher feed prices that cut into already razor-thin (or negative) margins. For our corn farming friends who love to defend these mandates, I would really appreciate it if you would explain to me why it’s OK for you to pull money out of my Dad’s pocket and put it into yours. I know your argument is that you deserve to make a good living. Well, so does he (don't we all!), but your profits are at his expense. But hey, you are getting yours, so you will defend the practice. Just don't expect me to keep quiet about the impacts.

The person trying to buy farmland is hurt by land prices that have exploded as a result of the mandates (unless they inherit family land).

The environment suffers as the mandated corn production means more herbicide, pesticide, and fertilizer usage, some of which ends up in our waterways.

The person who eats is hurt because higher commodity prices ripple through their food budgets, already stretched because of increasing energy costs.