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Let Them Eat Rice

Washington's unedifying ethanol food fight.

12:00 AM, Jul 25, 2008 • By DAVE JUDAY
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WASHINGTON IS IN THE MIDST of a food fight--a "food versus fuel" fight to be more exact. At issue is the Energy Independence and Security Act that mandates the use of 36 billion gallons of biofuels between now and 2022. That schedule is known as the Renewable Fuels Standard (RFS). The concept of mandating 36 billion gallons (up from actual production of 5 billion gallons at the time, and a projected 7.5 billion gallons by 2012) was put forth by President Bush in his 2007 State of the Union speech; the Democratic majority in Congress passed it 10 months later in December 2007.

Now, halfway through 2008, there are regrets about the RFS--at least in some quarters. Governor Rick Perry of Texas--George W. Bush's former lieutenant governor--has asked for a waiver of this mandate. So has Jodi Rell, Republican governor of Connecticut (the state President Bush's grandfather once represented in the U.S. Senate). The way the law is written, states can petition for waivers based on economic harm to their state or region. Waivers won't come easy--it is the Bush administration that grants them, and everyone from the president down has publicly defended the biofuels policy.

So have a number of legislators. Iowa Republican Senator Charles Grassley is among the most vociferous. He's written letters to 13 Iowa companies that are members of the Grocery Manufacturers Association (GMA), a trade association lobbying for changes in the RFS, which has hired a public relations firm for their campaign. Grassley refers to GMA as the "Big Food" lobby. His letter states in part: "This smear campaign led by an organization of which you are listed as a member is harmful to an honest discussion and should be abandoned."

As for his contribution to intellectually honest and constructive discussion, Grassley was quoted by reporter Philip Brasher in the Des Moines Register saying: "If part of our problem is that the Chinese are going to eat meat and you've got to have corn and soybeans to feed the Chinese their meat, then why isn't it just as legitimate for the Chinese to go back and eat rice as it is for us to change our policy on corn to ethanol?" As this "let them eat rice" soundbite made clear, the debate over the food versus fuel issue is about as undignified as a full out real food fight at a summer camp cafeteria.

In trying to exonerate ethanol, its advocates point to a cheap dollar, the influence of speculators, high energy costs, to Chinese demand for meat and grain, to a short wheat crop in Australia, and other factors as causes of commodity and food inflation. To be sure, the commodity sector is caught in a bit of a perfect storm--and all of these factors and more have contributed to higher food prices. But that's no defense of the RFS's massive, mandated biofuels production, which remains the fundamental change that is driving the agricultural commodity markets.

Loose monetary policy does indeed cause speculative bubbles that can push up commodities prices. Investing in commodities--rather than securities--is the best hedge against inflation. That's why so many pensions and mutual funds are heavily invested in corn and soybeans and crude oil right now. But it takes a stretch of the financial imagination to argue that speculative investment is the primary cause of the commodity inflation--speculative institutional investors are putting their money where they see prices already going up. Agriculture and energy commodities have seen bull market runs and attracted investment fund money, but construction-based commodities, like lumber and copper have not. The difference? There is a demand for food and fuel; there is not for building materials. In other words, demand--not speculation--is still the primary driver of price. And the strongest and fastest growing demand for corn and soybeans is from the biofuels sector.

On the supply side, there indeed have been shortages of some crucial commodities around the world, especially wheat. But consider the curious role U.S. biofuels policy played here too. At the end of October 2007, the Australian Bureau of Agricultural and Resource Economics (ABARE) which is the repository of official agricultural statistics for Australia, the world's largest exporter of that wheat, announced it was lowering the Australian wheat crop estimate to 12.1 million metric tons (MMT), from the previous projection of 15.1 MMT. In the two weeks after that announcement, corn prices increased from $3.70 per bushel to $3.83 per bushel despite a record harvest. Why would corn prices rally on the news of a global wheat shortfall? Because ethanol users of corn needed next spring's acres to be kept in corn in order to meet ethanol's demand for feedstock.