Surprising fact du jour
In 2009, the US expects 33% of the corn it produces will go to biofuels. The FT:
In Chicago, spot corn hit a record high of $6.43 a bushel and corn for delivery next year – by which time the US forecasts that about 33 per cent of its corn crop will be consumed by the biofuels industry – hit a high of $6.97 a bushel.
Given how much corn the US Midwest grows, that strikes me as a lot.
Update: Economics of contempt – in a comment — argues that the US biofuels industry is set to consume at least 13% of global corn production.
I noticed a similar remark in the FT/ a few weeks ago, and did a bit of research. The U.S. is far and away the biggest corn producer in the world (producing more than twice as much as the second-biggest corn producer, China). Based on my calculations (which I spelled out here), the U.S. biofuels infustry will consume about 13% of all the corn produced in the world.
My calculations were rough, but given the increased subsidies, I imagine the true number is actually on the high side of 13%.
interesting calculation ….
Brad, this is off-topic, but it’s a suggestion for a thread topic. On Econbrowser, a commenter posted a 6/3 Reuters summary of an interview with Robert Mundell, in which it is claimed that the Chinese are looking to deal with their dollar glut by creating an account in the IMF.
That struck me as impractical, first because the size would not be large enough to deal with China’s problem, but also that the financial community would not be fooled by the intellectual dodge involved in creating an asset based on dollars whose value is simply not marked to market. Plus the moral hazard problem, that if it did stabilize the dollar temporarily, it would only encourage more borrowing.
But I’m no expert, which is why I am posting this query here, in the hope that you will discuss this proposal, including the mechanics of how it might be done, who it would benefit, and whether it would be likely to succeed.
If China is willing to hand over its reserves to the IMF, i would be shocked. SHOCKED. It basically implies giving up China’s flexibility to manage its foreign assets. And I would be surprised in China is really serious about Mundell’s new Bretton Woods world of globally fixed exchange rates.
tis an interesting topic, i agree — the challenge is that i really don’t know where to start …. tis such a different vision of the likely next global financial order from mine that i am kind of speechless, and well, i don’t really think China is seriously considering mundell’s formulations. but what do i know — he clearly talks to a lot more Chinese policy makers than I do (that isn’t hard, by the way ….)
The USDA Outlook Report No. (FDS-07D-01), May 2007 states on page 6 of 20:
“With continued strong ethanol expansion, USDA’s 2007 long-term projections
indicate that more than 30 percent of the corn crop will be used to produce ethanol by 2009/10, remaining near that share in subsequent years.”
OTOH, the same report says: “USDA’s 2007 long-term projections show average corn prices reaching $3.75 a bushel in the 2009/10 marketing year”, while today July Corn closed up 28 3/4-cents at $6.43 1/4.
Which strengthens the logic of the Saudi move I mentioned in comment #31 of post “Scary”.
(BTW, I just thought Realist sounded better than Realthink.)
bsetser: If China is willing to hand over its reserves to the IMF, i would be shocked. SHOCKED.
You and me both. I can’t help wondering if what Mundell and whichever SAFE officials he refers to mean is some sort of “triangulatable” artificial currency. Mundell’s been a fan of a non-national reserve currency forever. Having a credible one, in the dreams of some SAFE officials (and you can tell we’re into personal viewpoint, not company line territory now) would give them something other than a dollar to peg to and a relatively clean exit from their dollar reserves. In my view, it’s strictly dreamland but I suppose I can see the emotive appeal to certain parts of SAFE.
Brad,
That 33% figure that has been put out assumes a bumper crop of corn for this next year. A 10% reduction in the harvest would mean that ethanol would use 50% of the harvest.
Corn hasn’t been put into the ground yet because the weather was long and cold and that means that yields will be lower unless it gets in the ground soon.
It will be interesting to see how long the illusion of corn based ethanol persists. A product that is 1/8th as efficient (green wise) as Brazilian sugar cane ethanol and yet we push it in this country even though it rusts pipelines and has to be trucked. High tariffs for Brazilian ethanol and the support of corn ethanol are good only for politicians who pander to a vote (incidentally McCain voted against them but virtually no one else sided with him). Economically they make no sense.
While ethanol supports high prices for corn, the mainstream media, in my opinion, still often misses the main driver of corn prices – it is still new Asian protein demand (corn feed grains).
-SA (first time poster, long time reader)
I would love to see the corn ethanol issue come up in a Presidential debate.
SA — thanks for the comment. I agree that the core source of demand for corn is animals — ergo, rising demand for chickens and pork and beef as a growing group of consumers reaches an income level that allows more consumption of meat. that said, I am a bit surprised that the resevoir of spare agricultural capacity — which seemed large in the 80s, in much the same way that the saudis had spare pumping capacity — has been depleted so fast. But many important things happen when you aren’t watching closely.
incidentally, my father is a chemist and he is convinced that ethanol production consumes more energy than it produces — so on net, it isn’t even a solution to the problem it claims to solve.
MMcC –
There are a host of alternative anchors other than an international reserve currency. Lots of countries peg to a basket, or even to the euro. Moreover, China’s core problem isn’t that it manages against the dollar (tho that is part of its problem). Its core problem is that is wants to hold the rmb at an undervalued level against the dollar. It could peg to the euro and insist on remaining undervalued relative to the euro. I personally don’t think that would address China or SAFE’s troubles.
What i cannot quite see if why China — which prioritizes its sovereignty so highly and has argued so vehemently that it should have a sovereign right to have an undervalued currency if it wants to — would be willing to accept the limits on its sovereignty Mundell is suggesting.
Of course, by making a sovereign decision to peg to the $ China has given up some monetary autonomy (tho not all, b/c of its capital controls). But that loss of sovereignty is something the PBoC — which wants more autonomy — has long wanted to change. And China certainly has shown no willingness to abide by international norms when it comes to reserve disclosure or the design of a sovereign fund (no norm suggests combining the agency that manages big state banks with a big external portfolio manager), so I just don’t quite see it.
Thanks, Brad. Maybe as the story develops, you’ll find a reason to comment on it.
bsetser: “I personally don’t think that would address China or SAFE’s troubles.”
Me neither. I can’t actually get my head around what Mundell is proposing or why China would favour it. I note he also thinks China would favour an Asian Currency Union and, indeed, a World Currency (which, I suppose, is just another way of thinking about the IMF plan…) I don’t think there’s anything to what he’s suggesting – at least, not from the Reuters report, which I made little sense of. I completely agree that no magic wand from the IMF is going to solve China’s currency issues. I don’t understand what Mundell is suggesting or why it would help. I would, however, suggest that some population of SAFE/PBoC officials are more than willing to suspend common sense when a Nobel winner tells them he’s got an easy out for them in his back pocket.
The story sounded far more like a description of what Mundell believes than a description of anything that might happen — with the hook being Mundell’s assertion that China was taking his ideas seriously. Who knows tho — Fan Gang has published articles indicating that the current global monetary order isn’t working, and he is more of fixer than a floater (i think his critique was that the US wasn’t doing its job in the system, not that the China was pegging) so there may be appetite in the PBoC to think big …
One has to be very careful when a newspaper article talks about “Chinese officials.” There are a lot of think-tanks and policy groups in China whose job it is to think of new ideas, but just because someone has a new idea, doesn’t mean that it is getting anywhere.
Paulson has suggested that China get more voice in the World Bank and IMF in exchange as something of a “carrot” for more flexible exchange rates. The problem here is that I just don’t see why China would want to have a greater voice in the IMF. Right now the IMF needs China more than China needs the IMF.
The IMF and World Bank both have had to adjust to new global economic realities, and the World Bank has positioned itself as something of a think-tank and laboratory for anti-poverty programs, and the World Bank is very heavily and usefully involved in projects like setting up a national health care system in China.
I’m not sure what the role of the IMF is. Now that everyone has huge reserves, there isn’t much need for the IMF to bail anyone out. Also, the IMF has gotten so much ill-will in the developing world from its “structural adjustment” programs of the 1990’s, that now that the developing world is getting on its feet, no one is particularly interested in working with the IMF.
Brad, your father is spot on in pointing to the Energy Return On Energy Investment (EROEI) issue. However, EROEI is not the only or ultimate factor weighing against corn ethanol from an energy standpoint (i.e. leaving aside the food and CO2 emissions issue), as you have to consider the USEFULNESS of the different forms of energy. Thus, the natural gas or coal used to provide heat for the fermentation and distillation steps cannot be used to fuel a car.
So, _IF_ natural gas or coal were in unlimited supply, the production of corn ethanol could still make sense even if the overall process were a net energy loser (again, just from an energy standpoint).
Now, considering the real status of natural gas reserves, does it make sense to burn it for producing corn ethanol when natural gas has such essential uses as home heating & cooking and power generation?
And considering the real status of coal reserves, wouldn’t it be sensible to save it for power generation and for metallurgy?
Note that for Brazilian sugarcane ethanol these considerations do not apply because sugarcane bagasse is used to provide heat for distillation (and there is no fermentation step).
Note also that lack of natural gas or long blackouts have the potential to trigger catastrophic societal collapse in the next decades, in which case people will not worry about what the sea level will be in 100 years.
The other factor here is that technology has vastly reduced the price of conversion from corn to ethanol.
http://www.ethanol-gec.org/information/briefing/16.pdf
Also it matters if the government subsidies went into capital plant. If government subsidies went into capital plant, then you’ve already have sunk costs, and the important factor is the marginal return.
I suspect that part of the reason that we don’t have spare capacity now is that during the 1990’s the trend was to get rid of the price supports that created excess agricultural capacity.
One other thing is that Harper’s Magazine wrote an article earlier this year saying that alternative energy was the next bubble.
On the other hand, there is enough coal out there to last us until we put up the big solar power satellites.
“On the other hand, there is enough coal out there to last us until we put up the big solar power satellites.”
Don’t bet the farm on it.
http://europe.theoildrum.com/node/2726/
According to the CEO of a major ethanol producer, 1 bushel of corn can produce the equivalent of 2 gallons of gas (including the lower energy content of ethanol), so $7 still looks cheap.
Was it just a rumour that we now have safe nuclear technology — that we can power up our cities with little itsy bitsy things available in great abundance? And if we do this, won’t we have reduced greatly our dependence on dead dinosaurs and greedily- horded grains?