R-Squared Energy Blog

Pure Energy

The Controversial World Bank Report on Biofuels

I mentioned it earlier in a post, but now the full text of the World Bank report blaming biofuels for 75% of the rise in food prices has been posted:

A Note on Rising Food Prices

I don’t have time to critique it right now, but wanted to call attention to it since many had questions about how the conclusions were reached. So, you now have access to it.

July 14, 2008 Posted by | biofuels, food prices, The Guardian | 2 Comments

Peak Convenience

In the U.S. (and most of the developed world), people are accustomed to great convenience. We live in climate-controlled homes, wake up each morning, take a hot shower, and then eat a breakfast consisting of foods from halfway around the world. We hop into our cars, adjust the temperature, and head off to work. We fly across the country for a few hundred dollars. We send letters from coast to coast for 42 cents. For us, ‘inconvenience’ occurs when a store is closed on Sunday.

‘Those people’ living in far away places who have to put up with the inconvenience of intermittent power, no heating or cooling, and who have to walk everywhere they go (or ride packed buses/trains) are only images on television. Yet compared to the U.S., much of the rest of the world deals with inconvenience on a daily basis.

But as oil prices have climbed – and have taken almost everything up with them – people are starting to give up some conveniences. According to the American Public Transportation Association, 2007 saw usage of public transportation at a 50-year high. 2008 has seen additional increases in mass transit usage. People are starting to give up the convenience of personal transportation. (For some like me that hate to drive, mass transit isn’t such an inconvenience. If it takes me longer to get to work, I can work on the bus, and I get to let someone else do the driving.)

Some are losing the convenience of air travel:

And you think you’re trying to save gas …

[Dan] Garton [American Airline’s executive vice president of marketing] admits that some current flyers simply will not be able to fly.

“It’s an unfortunate part of this because our country has gotten accustomed to being able to fly somewhere for the weekend,” he said. “Everybody can go see Aunt Millie for her birthday, and some of that may change for some of our customers. Seventy-eight percent of our customers fly once a year. And so some of those people may not be able to fly anymore, because we will raise our prices by hook or by crook.”

Yes, airlines are going to have to raise prices to survive. And the high cost of oil not only takes a bigger cut out of personal transportation budgets, but it drives up the cost of producing food, and the cost of getting the food to the store. For some, growing a garden to help stretch the food budget isn’t necessarily a burden (unless you are 12-years old and would rather play Rock Band on your Xbox than pull weeds in the garden). But it certainly is less convenient than dropping by your local grocery store and finding that your favorite foods are never out of season.

The thought struck me as I got ready for work a couple of days ago that we may have reached ‘peak convenience’ as a result of high oil prices, which I believe are here to stay. Most people are going to find that certain conveniences that we have taken for granted during the age of cheap oil are less attainable (i.e., more expensive) than they once were. I can see a future in which something like the morning shower shifts to later in the day, after the solar water heater has had time to heat up the water. Or we have to drop our electrical usage way down at night because our solar output has dropped off. People are definitely going to have to become accustomed to tracking their electricity usage, to avoid a very big surprise at the end of the month. (On the flip side, I think we will continue to make medical and technological advances, so it isn’t as if I think we are headed back to the Stone Age).

Having grown up without great convenience (by Western standards), I don’t think I will have a difficult time adjusting. However, many I know would never consider public transportation. I know people who would circle the Walmart parking lot 10 times before they would walk from a parking spot that isn’t within 50 feet of the front door. The only food they have ever known comes from the supermarket. These are the same people who scream the loudest for the government to do something about rising gas prices. These are also the people who I think will have the most difficult time adjusting to the new reality imposed by high oil prices. Some will sink ever further into debt as they wait in vain for the government to fix the problem.

July 13, 2008 Posted by | airplane transportation, food prices, mass transit, oil prices, Peak Convenience | 21 Comments

Show Me

I got a kick out of this story from the newest issue of Subsidy Watch:

New research from Missouri refutes allegations that ethanol mandates save money

A report from a Missouri-based research organization debunks the claim that Missourians are saving money through a state law requiring that retail gasoline contain a minimum of 10% ethanol. The report is in reaction to an assertion by the Missouri Corn Merchandising Association (MCMA), alleging that Missourians will save more than US$ 285 million through the E-10 mandate in 2008, and nearly US$ 2 billion over the following decade.

The MCMA arrived at these numbers by taking the price difference between pure-grade gasoline and E-10 blended fuel, and multiplying it by Missouri’s projected annual consumption.

However, the report by the Show Me Institute reveals two fundamental flaws with this calculation. One is that it fails to take into account the fact that E-10 blended fuel is cheaper because ethanol producers receive tax credits and other subsidies.

“Government officials cannot simply take tax dollars from the public, give those tax dollars to ethanol blenders, and then have ethanol supporters tell the public that ethanol is saving them money with cheaper fuel as though the subsidy never existed,” write the report’s authors, Justin P. Hauke and David Stokes.

The MCMA also does not take into account that E-10 blended fuel is about 2.5% less efficient than pure-grade gasoline, meaning that Missourians will be filling their tanks more often.

When both of these factors are taken into account, the ethanol blending mandates are shown to be costing Missourians about US$ 118 million per year.

“Although Missourians may pay nominally less for gasoline at the pump after the E-10 mandate, these savings will not reflect the actual cost Missourians would pay in complying with new ethanol fuel standards,” write the authors. “Ethanol subsidies are not free money — they are simply a wealth transfer from one taxpayer to another.”

The full report, “The Economic Impact of the Missouri E-10 Ethanol Mandate”, is available on-line by clicking here.

I hear these kinds of stories all the time. The corn/ethanol lobby wants credit for gasoline not keeping up with escalating oil prices (claiming it is ethanol that is keeping gasoline prices from keeping pace, but ignoring of course the fact that gasoline demand is softening due to the high price). They do not, however, want anything to do with claims that they have had an impact on food prices. So they won’t be happy about this:

Biofuels behind food price hikes: leaked World Bank report

LONDON (AFP) – Biofuels have caused world food prices to increase by 75 percent, according to the findings of an unpublished World Bank report published in The Guardian newspaper on Friday.

The daily said the report was finished in April but was not published to avoid embarrassing the US government, which has claimed plant-derived fuels have pushed up prices by only three percent.

The report’s author, a senior World Bank economist, assessed that contrary to claims by US President George W. Bush, increased demand from India and China has not been the cause of rising food prices.

“The report estimates that higher energy and fertiliser prices accounted for an increase of only 15 percent, while biofuels have been responsible for a 75 percent jump over that period.”

Expect the RFA to mobilize for a response in 3, 2, 1….

And Happy 4th to those of you who celebrate it. I plan to get away from the computer today.

July 4, 2008 Posted by | ethanol prices, ethanol subsidies, food prices | 37 Comments

Ethanol Roundup

Couple of ethanol-related stories of note in the past few days:

Corn prices hurt ethanol industry

Iowa’s ethanol industry is being squeezed by high corn prices that are partly due to the estimated 3.3 million acres of crops that have been destroyed by spring floods, Iowa Secretary of Agriculture Bill Northey said Friday.

“These kinds of prices are not profitable to produce ethanol at the current ethanol price,” Northey said at a taping of Iowa Public Television’s “Iowa Press.” “There will probably be decisions of whether they want to keep processing or not at these prices.”

Farmers can replant and still be covered by crop insurance, but coverage levels drop with each passing day, and late-planted crops could face the threat of frost in the fall, ag officials said earlier this week.

That is ironic. It is sort of like the fact that high oil prices are hurting oil refiners.

The next one spells out some of the now realized implications of tying our food supply to our fuel supply:

Flooded corn crop to bring wave of higher food prices

NEW YORK – Raging Midwest floodwaters that swallowed crops and sent corn and soybean prices soaring are about to give consumers more grief at the grocery store.

Rod Brenneman, president and chief executive of Seaboard Foods, a pork supplier in Shawnee Mission, Kan., that produces 4 million hogs a year, said high corn costs are already forcing producers in his industry to cut back on the number of animals they raise.

“There’s definitely liquidation of livestock happening,” and that will cause meat prices to rise later this year and into 2009, said Brenneman, who is also the vice chairman of the American Meat Institute.

Brenneman’s cost for feeding a single hog has shot up $30 in the past year because of record high prices for corn and soybeans, the main ingredients in animal feed. Passing that increase on to consumers would tack an extra 15 cents per pound onto a pork chop.

It’s a similar story for U.S. beef producers, who now spend a whopping 60-70 percent of their production costs on animal feed and are seeing that number rise daily as corn prices hover near an unprecedented $8 a bushel, up from about $4 a year ago.

“This is not sustainable. The cattle industry is going to have to get smaller,” said James Herring, president and CEO of Amarillo, Texas-based Friona Industries, which buys 20 million bushels of corn each year to feed 550,000 cattle.

Corn’s prices were already rising before the floods, driven up 80 percent over the past year as developing countries like China and India scramble for grains to feed people and livestock. U.S. production of ethanol, an alternative fuel that can be made with corn, has also pushed prices higher, prompting livestock owners to lobby Washington to roll back ethanol mandates.

For the record, my Dad is in the cattle business, and he at first thought the ethanol mandates were a great thing. When I testified against the proposed Montana ethanol mandate in 2005, he told my Mom “I don’t understand why he would testify against farmers.” I warned him at the time that these mandates were likely to distort markets and drive up prices in unexpected ways. I told him that I favor incentives, but mandates were not the way to go. But the government was intent on “helping”, and of course they have such a good track record on energy policy…

June 23, 2008 Posted by | ethanol production, food prices | 14 Comments

Food Riots

As I have been arguing for years, this is not going to have a happy ending. Some day we will look back on this ethanol mandate fiasco as one of the greatest mistakes ever in American energy policy:

Riots, instability spread as food prices skyrocket

(CNN) — Riots from Haiti to Bangladesh to Egypt over the soaring costs of basic foods have brought the issue to a boiling point and catapulted it to the forefront of the world’s attention, the head of an agency focused on global development said Monday.

“This is the world’s big story,” said Jeffrey Sachs, director of Columbia University’s Earth Institute.

“The finance ministers were in shock, almost in panic this weekend,” he said on CNN’s “American Morning,” in a reference to top economic officials who gathered in Washington. “There are riots all over the world in the poor countries … and, of course, our own poor are feeling it in the United States.”

What could be behind this? Of course higher energy prices are partially responsible. But I think there’s more to it:

In the United States and other Western nations, more and more poor families are feeling the pinch. In recent days, presidential candidates have paid increasing attention to the cost of food, often citing it on the stump.

The issue is also fueling a rising debate over how much the rising prices can be blamed on ethanol production. The basic argument is that because ethanol comes from corn, the push to replace some traditional fuels with ethanol has created a new demand for corn that has thrown off world food prices.

Jean Ziegler, U.N. special rapporteur on the right to food, has called using food crops to create ethanol “a crime against humanity.”

“We’ve been putting our food into the gas tank — this corn-to-ethanol subsidy which our government is doing really makes little sense,” said Columbia University’s Sachs.

Former President Clinton, at a campaign stop for his wife in Pennsylvania over the weekend, said, “Corn is the single most inefficient way to produce ethanol because it uses a lot of energy and because it drives up the price of food.”

Not everyone is buying that, though:

Some environmental groups reject the focus on ethanol in examining food prices.

“The contrived food vs. fuel debate has reared its ugly head once again,” the Renewable Fuels Association says on its Web site, adding that “numerous statistical analyses have demonstrated that the price of oil — not corn prices or ethanol production — has the greatest impact on consumer food prices because it is integral to virtually every phase of food production, from processing to packaging to transportation.”

Couple of things. First, the RFA is not an environmental group. It is the ethanol lobby. Might as well say the National Mining Association is an environmental group. Second, how does the rate of food inflation compare to other items that depend on oil for every phase of manufacture and distribution? How about plastics, for instance? The RFA and other ethanol apologists should stop trying to deflect blame and own up to the issue.

Again, I don’t deny that fuel prices are fueling inflation. But that is due to tightening supplies. This food inflation problem is partially self-inflicted by our misguided energy policies.

April 14, 2008 Posted by | ethanol, food prices, inflation, Renewable Fuels Association | 38 Comments

A Vicious Circle

What a vicious chain of events our politicians have set into motion. It just continues to worsen.

It started out innocently enough. Oil prices were climbing. Our energy production was shifting to an ever greater extent to countries that are hostile to the U.S.

So, Step 1 is to propose a solution:

1. Subsidize ethanol production to encourage biofuels and enhance energy security.

However, subsidies didn’t do the trick. It was still too expensive to produce ethanol. People still chose gasoline derived from hostile sources over more expensive ethanol. What we really needed was Step 2.

2. Let’s mandate ethanol usage.

At the point that the subsidy turns into a mandate, things change. Now, the fuel doesn’t have to be economically priced. It is going into the fuel supply regardless of the price. And this kicks off a massive expansion of ethanol capacity.

But soon we notice that too many people are building ethanol plants. This is causing a glut of ethanol, and putting downward pressure on the price of ethanol. On the other side, it is raising the price of corn. This lowers the margins for ethanol producers, and some producers start to go bankrupt. Projects are delayed or cancelled. The solution? Proceed to Step 3 (which was entirely predictable):

3. We need to raise the mandate for ethanol usage.

Unfortunately this leads to more of the problems that arose from the original mandate. Corn prices go even higher. Land prices continue to climb. Land is shifted to corn production, forcing commodity prices up in other areas. Very few segments of the population are experiencing true benefits.

The primary beneficiaries are commercial corn (and other commodity) farmers who purchased their land several years prior to the mandate. They are truly experiencing a windfall from these policies, and thus will fight the hardest to continue down this ill-advised road.

Secondary beneficiaries are lobbyists who defend the practice, as well as those who are willing to write papers (commissioned by the National Corn Growers Association) that downplay the consequences (or even better, point the finger in another direction).

The ethanol producer is hurt each time the overbuilding cycle occurs. They are starting to realize that the energy business is often low margin (and cyclical), and not as lucrative as they once thought. Maybe the solution is to increase the mandate again? 😉

The cattle rancher (like my Dad) and pig and poultry farmers get hurt from higher feed prices that cut into already razor-thin (or negative) margins.

The person trying to buy farmland is hurt by land prices that have exploded as a result of the mandates (unless they inherit family land).

The environment suffers as the mandated corn production means more herbicide, pesticide, and fertilizer usage, some of which ends up in our waterways.

The person who eats is hurt because higher commodity prices ripple through their food budgets, already stretched because of increasing energy costs.

So what’s the solution to this mess that has been made? I think it is simple, really. We all need to become either corn lobbyists or corn farmers. That way we all get rich and can afford to pay the financial consequences of spiralling inflation resulting from these mandates. (I suppose we will need to be subsidized for our farm purchase, since farms have gotten pretty expensive).

As for the impact on the environment? We can simply commission a study to show that there is in fact no impact on the environment. Ah, the aquifers. I forgot about those. Looks like I will need to commission another study.

Problem solved.

March 10, 2008 Posted by | corn prices, environment, ethanol subsidies, food prices, mandates, subsidies | 342 Comments

Ethanol in the News

And the news is bad. First up, an issue that is shaping up to be a major battleground between states. Nate Hagens brought this issue up on yesterday’s API call, but it was part of the lost transcript:

Ethanol Boom Saps Water

Mike Adamson remembers when water wasn’t such a problem. As a kid growing up on his family’s cattle feedlot along the Colorado-Kansas border, “you could dig a post hole and see water runnin’ in the bottom,” he recalls. Today, Adamson is 48 and in charge of the family business, Adamson Brothers and Sons Feedlot, a holding ranch for cattle as they go to market. And the water, he says, is disappearing. “The lakes are gone. The wetlands are gone.” In fact, Adamson adds, entire stretches of the nearby Republican River are gone.

Growing corn demands lots of water, and, in eastern Colorado, this means intensive irrigation from an already stressed water table, the great Ogallala Aquifer. One sign of trouble: in just the past two decades, farmers tapping into the local aquifers have helped to shorten the North Fork of the Republican River, which starts in Yuma County, by 10 miles. The ethanol boom will only hasten the drop further, say scientist and engineers studying the aquifers.

The region’s water shortage has pitted water-hungry farmers against one another. And lurking in the cornrows: lawsuits and interstate water squabbles could shut down eastern Colorado’s estimated $500 million annual ethanol bonanza with the swing of a judge’s gavel. Collectively, “[ethanol] is clearly not sustainable,” says Jerald Schnoor, a professor of engineering at the University of Iowa and co-chairman of an October 2007 National Research Council study for Congress that was critical of ethanol. “Production will have serious impacts in water-stressed regions.” And in eastern Colorado, there’s lots of water stress.

And the money quote:

“Trying to solve problems by using the same old techniques doesn’t solve the problem,” Adamson says. “We’re going to make the area a desert. It’s going to be uninhabitable.” And that would be a high price to pay.

Check out the article. It’s a good one, and concerns an issue that is only going to grow more urgent.

Next up, last year’s crop report (published in December, but I just saw it yesterday):

CAN THE U.S. PLANT MORE CORN, MORE SOYBEANS, AND MORE WHEAT?

U.S. crop producers made dramatic shifts in acreage in 2007. The shifts were motivated by rising corn-based ethanol production and high corn prices, rising wheat prices, and a surplus of soybeans.

The acreage shift was led by a 17 million acre increase in feed grains, including 15.3 million more acres of corn. Winter wheat acreage increased by about 3.1 million and harvested acreage of hay was up by nearly one million acres. These increases were accommodated by an 11.9 million acre decline in soybean plantings, 1.3 million fewer acres of spring wheat, 4.4 million fewer acres of cotton, and about 900,000 fewer acres devoted to other oilseeds; edible beans, peas, and lentils; and sugar beets. In addition to the acreage shifts, total planted acreage (harvested acreage of oats and hay) increased by four million acres. The large increase in total acreage likely includes some pasture acreage converted to row crops and perhaps an increase in re-planted acreage stemming from the spring freeze that damaged the winter wheat crop.

The next bit connected the dots:

Prices of corn, soybeans, and wheat remain at very high levels. World and U.S. inventories of wheat and soybeans are expected to decline sharply during the current marketing year.

Another bit suggests to me that supplies will tighten further, and I should be buying corn futures:

The USDA projects the consumption of U.S. corn during the current marketing year at 12.69 billion bushels.

Why is that a problem? Because the mandate in the new energy bill is such that it will require an additional 1.5 billion bushels in 2008 and 800 million bushels on top of that in 2009 – just to meet the higher ethanol mandates. By 2012, we will have mandated an additional demand on corn supplies of 3.8 billion bushels a year as the ethanol mandate moves from 5 billion to 15 billion gallons per year. (Throw a Midwestern drought in the mix, and we will see chaos).

This is as I predicted when ethanol producers were overbuilding capacity. This wasn’t the first time I said it, but here was a comment from over a year ago:

…never underestimate the power of the corn/ethanol lobby. If producers start to lose money, the mandate will go up. The other thing I would point out is that the demand for corn will continue to increase over present values. Demand from ethanol producers will continue to grow, and this is driving high prices now. Unless farmers can bring a lot of new production online, then corn prices will remain high even if ethanol prices start to drop.

That’s exactly the way it has played out so far, so you can expect the overbuilding cycle to continue – which means continuous high pressure on corn prices. Ethanol producers are getting the message loud and clear that the government will protect them as much as possible from the inherent cyclicality (often caused by overcapacity which crashes prices). If you overbuild, the government will increase the mandates to protect you. They have set up a vicious cycle, and a very undesirable (at least for me) experiment with our food supplies.

I wonder if my neighbors will object to me growing corn in my front yard when I move back to the U.S.

February 22, 2008 Posted by | corn prices, ethanol, food prices | 287 Comments

Impending Food Crisis?

I know this is my second pessimistic post this week, but along with an energy crunch, I have been concerned about a food crunch. The whole ethanol love affair has had me worried for a long time about the impact on food supplies. My concern has been that as we diverted corn to ethanol, corn prices would go up (affecting food prices) but that also other crops would be affected. Some cropland would be shifted to corn, to take advantage of the artificial market created by the ethanol mandates, and this could cause acreage of other crops to fall short.

And if you look at USDA Long Term Crop Projections, you will see that in fact, as corn prices climbed due to ethanol mandates, the amount of acres devoted to wheat and soybeans decreased – which has exacerbated an already difficult wheat situation. (Though they are expecting wheat acreage to rebound this year due to very high prices).

My good friend, Nate Hagens (a very level-headed guy), at The Oil Drum notes today:

Hard red wheat is limit up again (i think thats 9 days out of 11) and is at $19.80 a bushel. When it broke $6 a bushel last summer that was an all time high. I have to believe there are going to shortages. I know I can’t buy in bulk at local bulk food store right now – orders are backlogged. Ticker symbol MWH8. I don’t know enough about the differences between soft and hard wheat other than the hard has more protein and is used in breads, bagels etc. Wow. $20 a bushel….

Now there is an article from today’s FT suggesting that we are on the cusp of a food crisis:

The next crisis will be over food

A few days ago, I happened to hear Goldman Sachs discuss the state of the global financial system with European clients.

And what struck me most forcefully from this analysis – aside from the usual, horrific litany of bank woes – was just how much trouble is quietly brewing in corners of the commodities world.

Never mind that oil prices are high; that problem is already well known and gallons of ink have been spilt debating that, along with the pressures in metals and mineral spheres.

Instead, what is really catching the attention of Goldman Sachs now is the outlook for agricultural prices. Or as Jeff Currie, head of commodities research at the US bank, says with disarming cheer: “We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.”

Following that, a troubling historical note:

Now, to some readers of the Financial Times, that observation might seem odd. After all, inhabitants of the western world typically spend far more time worrying about the price of petrol for their car, rather than the price of wheat or corn. And when western investors do think about “commodity shock”, their reference point typically tends to be the 1970s oil crisis.

However, as Mr Currie observes, this is a dangerously blinkered view. Back in the 1970s, famine touched a much bigger proportion of the world’s population than the energy crisis, he says. And even today, rising food prices pack a powerful political punch in the developing (or partly-developed) world, to a degree that is sometimes underappreciated by the pampered west.

And the writing is on the wall in Africa:

Now, for any investor who is long on commodities right now (and I would guess that club includes Goldman Sachs), such trends might seem to smack of good news. For anybody who is dirt poor in the developing world, however, the picture is disastrous.

A WFP official, for example, recently showed me the red plastic cup that is used to dole out daily rations to starving Africans – and then explained, in graphically moving terms, that this vessel is typically now only being filled by two-thirds each day, because food prices are rising faster than the WFP budget.

Now I will be the first to acknowledge that higher energy prices across the board are a contributing factor here, but we have made matters worse with worldwide mandates that result in converting food into fuel.

February 15, 2008 Posted by | corn prices, food prices, wheat prices | 32 Comments

Impending Food Crisis?

I know this is my second pessimistic post this week, but along with an energy crunch, I have been concerned about a food crunch. The whole ethanol love affair has had me worried for a long time about the impact on food supplies. My concern has been that as we diverted corn to ethanol, corn prices would go up (affecting food prices) but that also other crops would be affected. Some cropland would be shifted to corn, to take advantage of the artificial market created by the ethanol mandates, and this could cause acreage of other crops to fall short.

And if you look at USDA Long Term Crop Projections, you will see that in fact, as corn prices climbed due to ethanol mandates, the amount of acres devoted to wheat and soybeans decreased – which has exacerbated an already difficult wheat situation. (Though they are expecting wheat acreage to rebound this year due to very high prices).

My good friend, Nate Hagens (a very level-headed guy), at The Oil Drum notes today:

Hard red wheat is limit up again (i think thats 9 days out of 11) and is at $19.80 a bushel. When it broke $6 a bushel last summer that was an all time high. I have to believe there are going to shortages. I know I can’t buy in bulk at local bulk food store right now – orders are backlogged. Ticker symbol MWH8. I don’t know enough about the differences between soft and hard wheat other than the hard has more protein and is used in breads, bagels etc. Wow. $20 a bushel….

Now there is an article from today’s FT suggesting that we are on the cusp of a food crisis:

The next crisis will be over food

A few days ago, I happened to hear Goldman Sachs discuss the state of the global financial system with European clients.

And what struck me most forcefully from this analysis – aside from the usual, horrific litany of bank woes – was just how much trouble is quietly brewing in corners of the commodities world.

Never mind that oil prices are high; that problem is already well known and gallons of ink have been spilt debating that, along with the pressures in metals and mineral spheres.

Instead, what is really catching the attention of Goldman Sachs now is the outlook for agricultural prices. Or as Jeff Currie, head of commodities research at the US bank, says with disarming cheer: “We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.”

Following that, a troubling historical note:

Now, to some readers of the Financial Times, that observation might seem odd. After all, inhabitants of the western world typically spend far more time worrying about the price of petrol for their car, rather than the price of wheat or corn. And when western investors do think about “commodity shock”, their reference point typically tends to be the 1970s oil crisis.

However, as Mr Currie observes, this is a dangerously blinkered view. Back in the 1970s, famine touched a much bigger proportion of the world’s population than the energy crisis, he says. And even today, rising food prices pack a powerful political punch in the developing (or partly-developed) world, to a degree that is sometimes underappreciated by the pampered west.

And the writing is on the wall in Africa:

Now, for any investor who is long on commodities right now (and I would guess that club includes Goldman Sachs), such trends might seem to smack of good news. For anybody who is dirt poor in the developing world, however, the picture is disastrous.

A WFP official, for example, recently showed me the red plastic cup that is used to dole out daily rations to starving Africans – and then explained, in graphically moving terms, that this vessel is typically now only being filled by two-thirds each day, because food prices are rising faster than the WFP budget.

Now I will be the first to acknowledge that higher energy prices across the board are a contributing factor here, but we have made matters worse with worldwide mandates that result in converting food into fuel.

February 15, 2008 Posted by | corn prices, food prices, wheat prices | 288 Comments

Impending Food Crisis?

I know this is my second pessimistic post this week, but along with an energy crunch, I have been concerned about a food crunch. The whole ethanol love affair has had me worried for a long time about the impact on food supplies. My concern has been that as we diverted corn to ethanol, corn prices would go up (affecting food prices) but that also other crops would be affected. Some cropland would be shifted to corn, to take advantage of the artificial market created by the ethanol mandates, and this could cause acreage of other crops to fall short.

And if you look at USDA Long Term Crop Projections, you will see that in fact, as corn prices climbed due to ethanol mandates, the amount of acres devoted to wheat and soybeans decreased – which has exacerbated an already difficult wheat situation. (Though they are expecting wheat acreage to rebound this year due to very high prices).

My good friend, Nate Hagens (a very level-headed guy), at The Oil Drum notes today:

Hard red wheat is limit up again (i think thats 9 days out of 11) and is at $19.80 a bushel. When it broke $6 a bushel last summer that was an all time high. I have to believe there are going to shortages. I know I can’t buy in bulk at local bulk food store right now – orders are backlogged. Ticker symbol MWH8. I don’t know enough about the differences between soft and hard wheat other than the hard has more protein and is used in breads, bagels etc. Wow. $20 a bushel….

Now there is an article from today’s FT suggesting that we are on the cusp of a food crisis:

The next crisis will be over food

A few days ago, I happened to hear Goldman Sachs discuss the state of the global financial system with European clients.

And what struck me most forcefully from this analysis – aside from the usual, horrific litany of bank woes – was just how much trouble is quietly brewing in corners of the commodities world.

Never mind that oil prices are high; that problem is already well known and gallons of ink have been spilt debating that, along with the pressures in metals and mineral spheres.

Instead, what is really catching the attention of Goldman Sachs now is the outlook for agricultural prices. Or as Jeff Currie, head of commodities research at the US bank, says with disarming cheer: “We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.”

Following that, a troubling historical note:

Now, to some readers of the Financial Times, that observation might seem odd. After all, inhabitants of the western world typically spend far more time worrying about the price of petrol for their car, rather than the price of wheat or corn. And when western investors do think about “commodity shock”, their reference point typically tends to be the 1970s oil crisis.

However, as Mr Currie observes, this is a dangerously blinkered view. Back in the 1970s, famine touched a much bigger proportion of the world’s population than the energy crisis, he says. And even today, rising food prices pack a powerful political punch in the developing (or partly-developed) world, to a degree that is sometimes underappreciated by the pampered west.

And the writing is on the wall in Africa:

Now, for any investor who is long on commodities right now (and I would guess that club includes Goldman Sachs), such trends might seem to smack of good news. For anybody who is dirt poor in the developing world, however, the picture is disastrous.

A WFP official, for example, recently showed me the red plastic cup that is used to dole out daily rations to starving Africans – and then explained, in graphically moving terms, that this vessel is typically now only being filled by two-thirds each day, because food prices are rising faster than the WFP budget.

Now I will be the first to acknowledge that higher energy prices across the board are a contributing factor here, but we have made matters worse with worldwide mandates that result in converting food into fuel.

February 15, 2008 Posted by | corn prices, food prices, wheat prices | 63 Comments