Global Poverty via the Ethanol Industry

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~ Friedrich Hayek

Progress is precisely that which rules and regulations did not foresee.
~ Ludwig von Mises

Each year in early October my grandfather summoned my entire family to come to his farm and harvest potatoes. Hunched over on all fours, each person quietly filled their buckets with these “earth apples." Each year he used a different field for his crop. One year he would plant potatoes, the next year beets or wheat. The potato replaced the grain diet on the European continent. It became survival food, especially during the two World Wars. Dumplings, potato salad and mashed potatoes are only a few potato dishes found in a long list in the European cuisine. The easy adaptability of the potato to grow almost anywhere in the world can produce an annual crop of 322 million tons of potatoes. Many African countries greatly benefit from growing the potatoes because they make them more self-sufficient in their food production.

In the age of nation building, stamping out of global warming, and driving for energy self-sufficiency, the new state appointed rival of the potato is maize, which is better known as corn — the yellow cob-born grain used in the production of ethanol fuel. As a blend with gasoline, biofuel powers automobiles and farm equipment. Its environmental friendly side effect is to reduce greenhouse gases, and some say it is the key to everlasting energy security in the future.

Ethanol fuel production received its first stimulus after the Arab oil crisis in 1973. During 1978 the US federal government sealed the project with the Energy Tax Act authorizing tax exemptions by blending gasoline with 10 percent ethanol. A floodgate of free money opened up for farmers and ethanol producers as the energy and agricultural departments spent billions of dollars on subsidies. This year’s estimates are between $5.5 billion to $7.3 billion of our tax dollars to be handed out to corn growers.

The incentives for farmers to grow corn in the US is not to meet the needs of a market that entails a healthy profit. Instead, they plant corn because they get paid to do so by a federal government interested in ethanol production. And as it turns out, producing ethanol is an expensive process. Archer Daniels Midland Corporation (ADM) out of Illinois, one of the largest producers of ethanol, received as much as $10 billion in subsidies between 1980 through 1997 along with favorable tax breaks costing taxpayers an average of $30 for every dollar ADM earns in profits. Add to that the $500 of federal and state subsidies it takes to reduce one metric ton of CO2-equivalent, one can literarily say that it is governments who heat up the globe by burning cash.

This year corn production has already increased by 15 percent over last year. Even President Bush, not a green lover but excited about ethanol, is expecting that farmers will plant 90.5 millions of acres of corn in 2007 in order to meet the demands of ethanol production of 132 billion liters by 2017. Corn prices already went up by 50 percent. The average price per bushel of $1.95, which had held steady over the past eight years, jumped up to $3.05 in January of this year, and is expected to rise as high as $3.40.

Corn is feedstock. It is consumed not only by humans but also by hogs, chickens and cattle. The drastic side-effect of higher corn prices is now reflected in the higher prices in the grocery store. The price of food went up 3.9 percent last year — faster than the inflation rate, which ranges around 2.7 in 2007. In particular, pork, beef, milk, eggs and poultry show drastic increases in their prices. So do fruits and vegetables. Considering that most people spend an average of 10 percent of their disposable income on food, higher prices in grocery reduces the spending on cars, homes or clothing. Health Nazis should also be concerned, since these higher prices drive people to cheaper processed foods that add to increased health risks in the poor segment of the population.

The US Federal Government’s targeted goal is to replace gasoline with corn-based fuel as an alternative energy source. This has caught the attention of poorer countries. Mexico, for example, is gradually replacing agave, a spiky-leaved, large plant which grows on high and arid land and takes eight years to reach maturity, with corn. Agave is the main ingredient for Tequila. Mexico produced 25 to 35 percent less agave this year and farmers take less care of their agave crop in favor of higher corn prices. The World Food Program (WFP), which recently stated that it can no longer feed the poor due to the impact of biofuel demand on food prices, is foolishly encouraging African and Latin American countries to take advantage of the rising demand of biofuels by planting corn; a popular world practice that is now devastating 900 million of the world’s poorest which rely on the UN feeding program.

It is quite clear that the state-inflated demand for corn is causing a global imbalance in food production. Farmers are replacing a variety of vegetables and fruits with corn due to the higher profit-per-acre corn brings. The two-year practice of crop rotation for corn drains the soil and requires more fertilizers on the following soybean crop. The additional cost ends up with the consumer. As food prices rise, it is the poor who suffer most from this inflated demand for biofuel. It is a burden that most people cannot afford as inflation keeps rising because of irresponsible spending and government debt.

The federal budget for the fiscal year beginning this October called for $2.9 trillion dollars in government spending. It includes increases for all the various cabinet-level departments. Among them were a 5.4 percent increase for the Department of Energy and 3.6 percent increase for Agriculture. According to Richard M. Ebeling, President of The Freeman, the average US household would have to shell out approximately $25,845 in taxes to cover the budget. Include with it the US federal government’s pre-existing liabilities of several trillion, and the average US household would have to pay an additional $31,000 a year for 75 years to pay off the debt already incurred by government spending. How can an average income household cover the basic needs such as food, clothing, and shelter when tax burdens already devour the wages of a lower income population? Poor people only become poorer as spending continues.

Republican presidential candidate Dr. Ron Paul seems to be the only congressional member who understands the global effects of subsidies. During his second presidential debate the question came up about oil profits. His response was: “I don’t think the profits are the issue. The profits are okay if they’re legitimately earned in a free market. What I object to are subsidies to big corporations when we subsidize them and give them R&D (Research & Development) money. I don’t think that should be that way. They should take it out of the funds that they earn…”

Here lies the answer to many of the energy questions. Let the private sector find a solution to new energy sources. Already technology advances at a rapid speed and its products remain ultimately competitive on the market where prices drop and become affordable to the average consumer. Just think of recent changes from VCRs and phonograph records to DVD’s and CD players, and the addition of cell phones and portable computers to modern life. All are now available at reasonable prices to low-income households. Industry continually comes up with new inventions that contribute highly to communication, organization and entertainment. The only sectors that remain high in cost with outrageous prices are sectors that are under government regulation and control: health care, medicine, education, housing, and now food prices. It would be a life-saving act of mercy to close these various departments of government, if people want to have a future for the next generation.

The trouble caused on the global market by the federal government’s sponsored ethanol industry increasingly outweighs the good it does. The idea of sacrificing food production in the name of biofuel as a future source of energy is an irrational concept. The consequence of higher food prices due to corn production hasn’t come from consumer choice but from government coercion. If the demand for energy is increasing, and biofuel is the answer, then where will the world grow its food? The big believers in a government supported biofuel industry might have to prepare for another big tsunami to hit the shores of Third World countries and at home if this insanity isn’t stopped. Just don’t blame capitalism if and when it comes.

Sabine Barnhart [send her mail] is a native German who moved to the US in 1980 and lives in Fort Worth, Texas.

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