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Part 1 of 2: Squanto would be proud…

January 20, 2008 in Agriculture, politics, science | 4 comments

If you remember your American History from high school or even a little bit of your basic primary school history, you will remember that Squanto was the Indian who helped the pilgrims. One of the things he helped with was teaching them how to grow food, not the least of which was corn. Look into the future almost four centuries and we have nearly perfected the growing of corn, in most any agronomic situation, from short dry years to long cool years and every juxtaposition.

This leads us into the topic of our post, corn for ethanol. In a politically charged year, and in a state where this subject is also politically charged, I put myself into the path of the train by saying anything at all about the subject. But I can’t resist.

I try to listen to Bob Brinker’s Moneytalk program every chance I get, and not because I need to learn market timing strategies or because I have a big old jar of money I need to invest, but because I typically find his guests informative.

Today, Bob’s main guest was John Zogby, the pollster. Before letting us hear the polling guru, though, Bob tackled this issue of corn for ethanol, making the statement that has oft been made in the news lately that the ethanol industry is responsible for dramatic increases in food costs. His proposition was that instead of using corn for ethanol we ought to be pushing for more and better nuclear power.

Bob is using a technique that frequently is used by politicians, and creating a question around an issue that is hard to challenge or disagree with. Obviously, we can understand the basic economics of using a commodity that is chiefly a livestock ration as a source of fuel alcohol. For livestock feeders, supply goes down and price goes up. Fine, no disagreement. The issue of nuclear power is a bit more touchy, but again, it is hard to argue with the idea of using a clean source of power for which the production technology has largely been mastered by U.S. and international industry.

The ideas that I can challenge, though, are the premises for the argument. Bob Brinker’s statements about ethanol and nuclear power stem from two main points. The first is the notion that we need to keep the cost of food down, at least as low as it has been and maybe lower. The second is a direct challenge to biofuel production as a viable alternative to foreign petroleum, by painting the whole industry with a single “ethanol” brush. I want to examine the food production part today, and take the energy issue into consideration in a future post.

Do you agree with the idea that our food costs are already too high? I don’t. I know that many people have much too much ‘stuff’ already, so much so that “decluttering” has become an industry unto itself. This points to the idea that our disposable income is such that more food costs can be absorbed by the average family, while perhaps displacing spending on some of this unneeded “stuff”. It is really a matter of examining what we define as “needs” and how they differ from “wants”.

If we value a high-quality, low-risk food supply, then we must be willing to pay a fair price for it. Someone has to produce that food, and to my way of thinking, we get only what we pay for. We ought to have the very best food production system in the world. Hands down, the best. And we shouldn’t sacrifice quality for price in this area.

The people who produce, prepare, and deliver food should be able to live comfortably on the income from their operations. This is equally as vital as the service a doctor provides. Additionally, growing corn is capital intensive, it requires investment in land, machinery, and seed – all before any return is realized by the farmer. It is hard work in often harsh conditions. And it is a huge risk (many things can ruin a crop, and the farmer won’t know until harvest time if he has a harvest or what his yield will be).

Food production is something we ought not try to cheapen just because some people don’t want to spend more money for the pizza or steak that they eat. It is something we certainly shouldn’t outsource to other countries. I take this position partly due to the recent history of quality control we have seen from certain foreign nations, and partly due to what I consider another real cause of food cost increases: transportation cost, especially related to the increase in fuel cost.

Despite a growing awareness that we ought to eat more local foods, both for economical and ecological reasons, we don’t actually do it: look at your potatoes, I bet that unless you live in Idaho, they aren’t very local; look at your apples, and then look toward Washington state; take a look at your oranges, and send thanks to California and Florida. I could go on, but you get the idea.
Our food production cost requires attention, and although corn is a legitimate input cost in many consumer goods, until we attempt to deal with 300% to 500% increases in basic fuel costs, it will not really matter. We still will need to process the food, to store and often refrigerate the food, and to get the food to the consumer (including the cost of trucking the food to stores and the cost of shoppers driving to the stores).

This is where we will pick up next time: fuel cost, energy, and transportation and how they all relate.

Give your thoughts, I’m anxious to hear!

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4 comments

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January 20, 2008 at 9:16 pm

Britt

One aspect I hope you’ll explore is the cost of using corn to produce ethanol, which in the short term, is of greater concern to me than the cost of food going higher. While I know the process has improved its efficiency since its development, I’ve also seen recent studies suggesting that other crops are easier (i.e. more efficient) to turn into ethanol. I’d hate to think what will happen to all the infrastructure investments made on the basis of corn-derived ethanol and the impact on corn growers.

In relation to the cost of food, I think we’ve undervalued the real cost of food for years, driven by this notion that we should all enjoy “Value Meals” at incredibly low prices. The actual cost of production continues to rise (equipment, fuel, chemicals, storage, etc.), but the desire of the average consumer to cover said expenses continues to drop. I wish people understood that their food doesn’t grow, on command, in a grocery store.

January 21, 2008 at 12:45 am

Shannon Ehlers

Thanks Britt, for your well-stated points. The opportunity cost of using corn (especially grain) is certainly a key motivator for the rapid development of alternate carbohydrate sources.

While fermentation is a relatively similar manufacturing process regardless of the starting substrate, the infrastructure investments in E85 pumps and flex fuel vehicle engines will likely make ethanol a viable choice for several years into the future, regardless of starting feedstock (i.e. corn grain, corn stover, switchgrass, industrial waste, etc). Much more to come in the second part!

Regarding your food cost summation, all I can say is ‘Amen’. You are among a small but growing group of people who are spreading awareness of food production to people who largely don’t know or don’t believe that there is a complex process leading up to the meals that they essentially take for granted. I’m afraid that our abundance has made us almost arrogant in our ignorance, while others half a world away are dying because they don’t have access to a reliable food supply. Shame on us.

January 25, 2008 at 11:51 am

Jeff Bruck

I look in the mirror each morning and often times cringe at myself. Not because I’m ugly but because I’m about 40 pounds overweight. I feel I’m about average in relation to my family and friends who for the most part are also overweight. I have some friends that are unemployed or make a poor living but still they are overweight. Money does not motivate them to eat less. I believe this is epidemic nation wide because face it, food is cheap! The most popular restaurants are all you can eat buffets. You find them in every community. That generally leads to a large percentage of food wasted and discarded. It’s easy to compensate for any rising food costs. You simply eat less! Don’t spoil yourself so much by eating out, it’s cheaper to purchase from the store and cook it yourself.

I agree with Bob Brinker on expanding our use of nuclear power. The technology is excellent and unlike other countries the standards of safety in the nuclear power industry is beyond comparison. I know the waste generated is a politically charged issue because no one wants it in their backyard but the risks are minimized by storing in remote and desolate areas like Yucca Mountain. There is also technology that can bury the waste deep in the ocean floors where there is virtually no risk of exposure to land or sea life. There are also cleaner coal technologies to explore more. We have hundreds of year’s availability to coal sources in the USA and we need to use it. Also, if the government gets off its duff and invests more into the technology of fusion this will be an even cleaner and safer energy source to draw from. The problem with these sources is they don’t power the combustion engine. We need liquid fuel.

Now let’s talk about fuel. Every year the consumer will use more and more fuel. You will transport yourself to work everyday to maintain or improve your standard of living. It’s the American way and I love it. Individually we can try to conserve and you may even get a group of your friends to conserve as well. But the fact of the matter is it would take a catastrophic event to lower our use of fuel. Every year there are thousands of automobiles added to the highways. Very few of those drivers live within walking distance of their work, school or play so they will choose to drive. Conservatism may make you feel good about yourself but it will not affect the overall use of fuel.

The standard for the last 40 to 50 years has been petroleum. For the last 30 years this industry has been controlled by a group of nations they call OPEC. Because we are addicted to oil they have a certain level of control over us. When these nations meet they make decisions of price and production. Believe me they do not set prices and production to benefit us. Over the past 30 years we have spent trillions of dollars for this black gold and we keep asking for more every year. OPEC is dominated for the most part by Saudi Arabia. The Saudi’s control OPEC because they can produce oil cheaper and have the largest reserves. Any time one of the other countries wants to sell cheaper the Saudi’s simply undercut them and put them back in their place. It costs OPEC approximately $1.50 to produce a barrel of oil. That includes research and development of new reserves. They sell it today nearly $100 per barrel. Nice profit. I could live pretty well on margins like that. We have to get away from these guys. They support fanatical terrorism all over the world with billions of dollars to wreak havoc all over the world. In essence we are funding the enemy we spend billions to fight. That’s what you call punching yourself in the face.

How do we get out of this mess? Energy Independence. We have to do whatever it takes to quit using their product. Part of that solution is biofuels. Biofuels use corn and other grains which right now are logistically and economically the best source. This won’t always be true. Cellulostic technology is improving every day and will someday be the standard. There is enough cellulose to produce every thing we need and more.

Also, as you stated earlier flex fuel technology is key and the government can do more by mandating flex fuel technology in all vehicles which will drive the demand and infrastructure to grow. With demand comes more research for additional sources that will certainly the cause as well.

I don’t deny that corn or bean derived biofuels have had an effect on food prices. But don’t give biofuels all the credit. One of the biggest players is China and other emerging industrial nations. Just look at the label of everything you purchase. Much of it is made in China or some other Asian country. Many of those products are produced from polymers made from our crops. Also, we can’t deny the large labor pool that needs to be fed. They are willing to pay whatever it takes feed the country and produce the products we depend on everyday. We also compete with them on many other chemical inputs that are used in crop production. I’m certainly not going to advocate any type of isolationism to avoid this because that’s just too dangerous.

So between higher input costs, even higher fuel costs and competition for all these, food prices are going to rise. When the obesity trends start spiraling downward then and only then will I feel food is getting uncomfortably high priced.

Corn for ethanol is simply the way it has to done for now. Someday we will look back at this and wonder what we where even concerned about.