U.S. Ethanol Production and World Hunger

Is the United States starving the world to save its citizens from high energy costs? Is processing corn into ethanol lowering global food supplies and leaving people hungry elsewhere?

There have been numerous attempts to link worldwide food inflation with U.S. attempts to lower oil imports through increasing production of ethanol. Most of these discussions are simple supply-and-demand models: by siphoning corn into ethanol production, the amount available to feed the world’s hungry people is reduced. This pushes up demand for other grains as alternative food sources, raising prices across the board and leaving poorer nations to do without.

The theory became widespread as grain prices on the Chicago Board of Trade spiraled during the first half of the year and wasn’t helped by droughts in Australia and South Africa. When Russia slapped a 40% export tariff on their wheat crop, when Argentina refused to share their wheat and Vietnam their rice, when food inflation protests exploded in Mexico, Italy, Pakistan, China and Indonesia, many fingers pointed to ethanol as the prime culprit.

There’s just one problem with the theory: it’s not supported by the facts.

Ethanol’s Place in the Food Chain

Ethanol is mainly produced from animal feed corn, as in “Iowa corn-fed beef.” Because this crop isn’t intended for human consumption in any country, directly linking ethanol to global food supplies is nonsense.

Ethanol production does not use the entire corn kernel, only the starchy part; the remainder is used for animal feed as originally intended. Industry advocates claim these by-products, termed distiller’s dried grains with solubles (DDGS), offer greater nutritional availability because of the processing, as breaking the kernel’s tough outer shell makes the grain’s innards more accessible to the animal’s digestive tract. (Feed corn is often cracked prior to feeding for this very reason, even if no ethanol is produced.)

Because removing all of that starch from the corn leaves a higher protein feed that’s loaded with vitamins, DDGS is in growing demand as a feedstock. It’s now being exported to the Eurozone, Canada and Mexico, while an Australian feedmill has requested a sample shipment for trial in the local dairies.

Ethanol in context

However, the real problem with the food-or-fuel theory is that it looks at food prices outside of the context of the global economy.

As is the case for many other commodities, several factors came together in 2008 to drive up prices. These include the usual suspects of financial market turmoil due to the subprime mortgage fiasco, a commodities price bubble caused by investors looking for safer places to park their funds than global equities markets and an historically weak U.S. dollar. Because most commodities are priced in dollars, when its value falls on the world market, prices must rise in an inverse ratio to compensate. Metals prices also shot through the roof, but ethanol production had nothing to do with that, either.

The unfortunate fact is that energy costs are more directly related to the price of processed foods than are the costs of raw materials. Value is added by processing, packaging, storing, shipping and refrigerating foods, all of which require energy, which also skyrocketed in price this year. No matter how high the cost of a bushel of corn rises, it remains less than 5% of the cost of a box of corn flakes. Even shipping unprocessed grains to hungry people overseas has become more expensive, with ocean freight charges just beginning to recede from record levels, too.

The U.S. heartland remains the breadbasket for the world. The 2008 corn crop is currently estimated at 12.288 billion bushels from 87 million acres, the second largest on record despite the spring flooding in the Midwest and close behind 2007’s record-breaking crop of 13.1 billion bushels. Around 20% of that will be exported, accounting for almost 70% of all world corn exports—without export tariffs.

Meanwhile, the growing ethanol industry contributed $47.6 billion to the U.S. economy in 2007, influencing or creating 238,541 jobs in various industrial sectors including 46,000 manufacturing jobs—jobs that must remain near the corn-producing states and therefore cannot be outsourced to India or China—and generating $4.6 billion in tax revenue for the federal government and another $3.6 billion for various local and state governments. The 6.5 billion gallons of ethanol produced meant that 228.2 million barrels of oil were not imported.

Perhaps the U.S. really can have its cake and let the world eat, too.

Ready for Winter? Home Heating Update & Heads Up

My last post here at Amateur Economists was all about the crazy run-around I experienced trying to get heating oil delivered to our house this summer for the coming winter. We ordered the tank filled in early June; but it was just last week that I finally got a heating oil company to fill our tank. CBS News also ran a special report last week about how the credit crunch in the financial markets is making it difficult for small East Coast oil companies to purchase heating oil for delivery. Subsequently a number of such companies in New England have already gone belly up.

While everyone I called here in Michigan staunchly denied that Mid-west supply problems or credit issues were crimping the availability of heating oil, the fact remains that, for the first time, it took a summer of arguing with various heating oil distributors to get one to finally deliver some to us, even though we were prepared to pay for it in full (and did). This is very unusual, since in the past these companies have always been anxious to deliver oil out of season, and even offer a discount for ordering it early.

Those days appear to be past.

Last winter it cost us about $2300 to heat a 1000 square foot, well insulated home with our oil burning furnace, and the cost per gallon is higher this year, even now. So we decided to research alternative ways of heating our home without committing to any one particular plan. After getting prices and reading up on all sorts of heating methods, we decided to buy a wood pellet stove.

Wood pellet stoves burn much cleaner than wood stoves. They make so little ash that they can be vented directly outside via a three inch pipe, much like a clothes dryer. They do not require a chimney and they do not build up dangerous creosote. The wood pellets are relatively cheap (currently about $350 for a pallet of bags that will keep a home this size heated all winter), and save the homeowner from constant scrounging for wood and the labor involved in splitting and storing wood.

Best of all, wood pellets are made from waste wood and sawdust that is compressed to remove all the moisture, so no trees are destroyed solely for the purpose of fueling pellet stoves. This is wood and wood products that would be thrown away anyway, and the burn is so clean it produces very little smoke. Some pellet stoves will also burn dried corn. Others will burn switchgrass pellets. So basically, the energy source is almost completely renewable.

One drawback: Because the pellets are fed into the burner from a hopper electronically, a small amount of electricity is needed to run the stove. This means that if you plan to rely heavily on a pellet stove, you want to make sure you have a back-up generator or another source of heat, just in case the electricity goes out.

We found a pellet stove for $1100. The installation will run about $400, and the pellets for the winter between $350 and $500. This means we will completely recoup our investment our very first winter, and we do have a full tank of oil and a working oil furnace that we can use for back up if necessary. Speaking with friends who actually live in larger homes and have used pellet stoves for several years, we discovered they rarely needed to use their original source of heat (the furnace). The pellet stove was sufficient.

So far, so good. But consider this: Almost every place we went to look at these stoves had a story to tell. The first store manager told us that last year he sold two pellet stoves in July. This July he sold 46. The next two places we visited have been unable to obtain the stoves for months and have tons on backorder. Three stores told us the stoves are no longer available from East Coast distributors, but some Mid-west distributors still have them in stock. We felt lucky to find a company that did have some still available for delivery. Ours should be here in about five days.

An article in the New York Times explains that even though oil companies made record profits this year, all of them are having supply problems due to geopolitical issues. U.S. oil supplies have been dropping for five consecutive quarters now, with the most recent quarterly drop being the steepest of all.

Western oil corporations deny vehemently that the scary “peak oil” scenario is responsible for this decline. Instead, they refer to “geopolitical peak oil”; which means that countries like Venezuela, Russia, and Iraq want to keep their oil profits in their own nations, even if it means having to develop the oil fields themselves and shut out multinational oil corporations.

It is completely understandable why developing nations would want to nationalize their oil profits. What is somewhat harder (for me) to understand is why our own government isn’t addressing what could turn out to be a real crisis here in the U.S. should we get hit with a very cold or severe winter.

Last winter, in the Michigan city in which I live, an elderly woman froze to death in her own home because the only disconnect notice legally required of the utility company was a warning flier tucked in her front door. It was still tucked in her front door when relatives found her body. She had been dead of exposure for several days. Family members said she was probably embarrassed to ask for help.

High Corporate Tax Rates Making United States Uncompetitive

A recent study by the Paris-based Organization for Economic Co-operation and Development which examined the national tax burdens and their impact on the growth and incomes in member countries concluded that corporate taxes are most harmful for growth. The study also concluded that investment is adversely affected by corporate taxation and that the most profitable and rapidly growing companies tend to be the most sensitive to high business tax rates.

With an average combined federal and state corporate tax rate of 39.3%, the United States has the second highest corporate tax rate in the world, next only to Japan. The corporate tax rate in the United States is even higher than socialist Sweden and welfare-states Germany and France. If the business is based in states like California, Iowa, New Jersey, or Pennsylvania which have high corporate tax rates, then the tax on business income is even higher than in Japan. Economists have long argued that this high rate of corporate taxation has made the United States uncompetitive, driving away capital. But the lawmakers in Washington, D.C., feel otherwise. A Government Accountability Office (GAO) study in 2005 came to the conclusion that almost 28% of the large American companies paid no tax that year.

Although the corporate tax rate is almost 39.3%, the share of corporate taxes in the Gross Domestic Product (GDP) is 2.5%. Ireland has a corporate tax rate of 12.5%, but the share of corporate taxes in its GDP is 3.4% – higher than the United States with its higher corporate tax rate.

The irony of the situation is that while the United States has the highest corporate rates, there are a lot of loopholes which favored businesses can use to avoid the high rates. The Tax Foundation looked at the 2005 GAO study and found that among the large companies that paid no taxes, 85% of them made no profits that year. The same year, two large companies – American Airlines and General Motors – used the loopholes and avoided paying taxes by reporting losses of $862 million and $10.5 billion. The loopholes also affect the economy adversely. Businesses spend millions of dollars to exploit these loopholes.

The United States taxes businesses on their worldwide income. This has important implications for American companies competing in foreign markets. Because of higher tax costs, American companies may lose foreign market share, generate lower returns for American shareholders, and hire fewer skilled workers in the United States.

In an effort to remain competitive, some American companies are changing their structure to become foreign-owned firms – the American company places itself under a new foreign parent company formed in a lower-tax jurisdiction. The firm still pays taxes to the U.S. government on all U.S. income, but it no longer pays U.S. tax on its income earned outside the U.S.

Other countries are cutting corporate tax rates because they’ve learned the importance of having a competitive tax climate. Countries cannot attract new business and job creation if their corporate income taxes are significantly higher than comparable nations. Most other major countries do not tax foreign business income as aggressively as the United States. In fact, most countries have “territorial” tax systems that tax businesses on domestic income only.

It’s time for the lawmakers in Washington to wake up and reform the tax code. In this ultra-competitive world, countries are going all out to woo businesses. The United States is becoming a less competitive place to do business. The inaction on the part of the lawmakers is only making it easier for other countries to woo American companies with lower tax rates.