Alan Beattie reported in yesterday’s Financial Times that, “The Doha round of trade talks juddered back to life over the weekend, with leading countries expressing enthusiasm for clinching a deal but giving few details about how it would work.
“Meeting at the World Economic Forum in Davos, Switzerland, about 30 ministers instructed their officials to step up talks to reach a framework deal, especially on agriculture.”
As this graph from The Wall Street Journal indicates, corn prices are increasing rapidly.
The FT article also noted that, “The revival of the round after its suspension last July follows a series of bilateral talks that included the European Union, the United States and large emerging market countries such as Brazil. Negotiating committees of officials at the World Trade Organisation in Geneva will reconvene at a senior level, although the talks agreed it would be premature to call a full meeting of ministers from the WTO’s 150 member countries.”
Mr. Beattie noted that, “France remains the most outspoken opponent of a deal that would expose European farmers to competition from abroad. Christine Lagarde, French trade minister, on Sunday played down the significance of the decision to restart talks.
“Celso Amorim, Brazilian trade minister who leads the Group of 20 developing countries, said he expected a big breakthrough in late March or early April, and a full framework deal agreed by the end of June.”
With respect to the U.S. perspective, the FT indicated that, “Susan Schwab, US trade representative, said the administration was more likely to renew the TPA if a deal emerged that opened up export markets for America’s farmers.”
On Saturday, January 27, John K. Defterios moderated a panel of Trade Ministers at the World Economic Forum in Davos.
Among the participating Ministers were Celso Amorim, Minister of Foreign Relations of Brazil; Peter Mandelson, Commissioner, Trade, European Commission; Susan Schwab, US Trade Representative; and Pascal Lamy, Director-General, World Trade Organization (WTO).
The event lasted about an hour and fifteen minutes; however, I have included excerpts from the event that only last about 11 minutes.
To listen my version of the highlights, just click here (MP3- 11 minutes).
Larry Elliott, writing today at the Guardian Online, provided this succinct summary of the Doha talks, “The Doha trade round is to be relaunched, even though, as expected, there was no immediate breakthrough in the talks at the weekend [meeting in Davos].”
On Saturday, President Bush continued to promote the Administration’s recent energy proposals in his weekly radio address.
President Bush reminded his listeners that, “To increase the supply of alternative fuels, I’ve asked Congress to join me in setting a mandatory fuel standard to require 35 billion gallons of renewable and alternative fuels in 2017 — nearly five times the current target. At the same time, we need to reform and modernize fuel economy standards for cars the way we did for light trucks, and conserve up to 8.5 billion more gallons of gasoline by 2017. By taking these steps, we can help achieve a great goal: reducing the use of gasoline in the United States by 20 percent in the next ten years, and cutting our total imports by the equivalent of three-quarters of all the oil we now import from the Middle East.”
Also on Saturday, the editorial board at The Wall Street Journal weighed in with a take on the President’s proposal and noted that, “A bit of sobriety would go a long way in discussing this moonshine of the energy world, however. Cellulosic ethanol — which is derived from plants like switchgrass — will require a big technological breakthrough to have any impact on the fuel supply. That leaves corn- and sugar-based ethanol, which have been around long enough to understand their significant limitations. What we have here is a classic political stampede rooted more in hope and self-interest than science or logic.”
The Journal added that, “No wonder, then, that the price of corn rose nearly 80% in 2006 alone. Corn growers and their Congressmen love this, and naturally they are planting as much as they can. Look for a cornfield in your neighborhood soon. Yet for those of us who like our corn flakes in the morning, the higher price isn’t such good news. It’s even worse for cattle, poultry and hog farmers trying to adjust to suddenly exorbitant prices for feed corn — to pick just one industry example. The price of corn is making America’s meat-packing industries, which are major exporters, less competitive.
“In Mexico, the price of corn tortillas — the dietary staple of the country’s poorest — has risen by about 30% in recent months, leading to widespread protests and price controls. In China, the government has put a halt to ethanol-plant construction for the threat it poses to the country’s food security. Thus is a Beltway fad translated into Third World woes.
“As for the environmental impact, well, where do we begin? As an oxygenate, ethanol increases the level of nitrous oxides in the atmosphere and thus causes smog. The scientific literature is also divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol’s net energy output is a marginal improvement of only 1.3 to one. For purposes of comparison, energy outputs from gasoline exceed inputs by an estimated 10 to one.”
The Journal editorial concluded by saying, “So here comes Big Corn. Make that Very, Very Big Corn. Sooner or later, our experience with this huge public gamble may make us yearn for the efficiency, capacity, lower cost and — yes — superior environmental record of ‘Big Oil.’”
With respect to the price of tortillas in Mexico, Mary Anastasia O’Grady explored this issue in much greater detail in an article published in today’s Wall Street Journal.
In part, Ms. O’Grady indicated that, “The sharp increase in Mexican corn prices, which fueled the tortilla price spike, followed big price increases for corn on international markets over the past year. The main cause, according to most commodity analysts, was the U.S. decision to subsidize ethanol made from corn. Growers who previously marketed their harvests to food and livestock companies suddenly have new demand from ethanol producers, who are also armed with a subsidy to make their bids more attractive. The increase in demand from government-subsidized ethanol producers pushed up prices.”
New York Times Op-Ed writer Paul Krugman also wrote about ethanol today. According to Mr. Krugman, “The only real substance was Mr. Bush’s call for a huge increase in the supply of ‘alternative fuels.’ Mainly that means using ethanol to replace gasoline. Unfortunately, that’s a really bad idea.
“There is a place for ethanol in the world’s energy future — but that place is in the tropics. Brazil has managed to replace a lot of its gasoline consumption with ethanol. But Brazil’s ethanol comes from sugar cane.
“In the United States, ethanol comes overwhelmingly from corn, a much less suitable raw material. In fact, corn is such a poor source of ethanol that researchers at the University of Minnesota estimate that converting the entire U.S. corn crop — the sum of all our ears — into ethanol would replace only 12 percent of our gasoline consumption,” Mr. Krugman said.
John Gapper, writing in today’s Financial Times, included this quote from Alberto Weisser, chief executive of Bunge, on the ethanol issue, “‘My biggest concern is that I do not want a gold rush to start that gives biofuels a negative reputation,’ he says. His worry is that demand for biofuels is raising the price of crops and having unintended consequences for food supplies. He estimates that 60 per cent of rapeseed in Europe is being converted into biodiesel. This has led food companies to import palm oil, which is less healthy for people than vegetable oil.”
Meanwhile, an article (“Food vs. Fuel”), which was recently posted at BusinessWeek Online, included these interesting excerpts, “The consequences, while still uncertain, are impossible to ignore. According to the most optimistic estimates, which involve a switch to still-unproven energy crops, replacing U.S. consumption of gasoline with biofuels would take at least 50 million more acres of American cropland. Some put the figure far higher. Meeting Bush’s mandate with corn ethanol alone isn’t even feasible, because it would mean an additional 80 million acres of corn. Eliminating gasoline entirely could require more than double today’s 430 million acres of cropland, by some calculations. Bioenergy threatens to eclipse food, livestock feed, and all other uses ‘as the major driver of American agriculture,’ testified Iowa farmer John Sellers at a recent Senate Agriculture Committee hearing.”
The BusinessWeek article also included this analysis, “In addition, biofuels are expected to bring a rare permanent change in farm economics. ‘People had grown accustomed to $2-per-bushel corn. That’s not going to happen anymore,’ says Bob Dinneen, president of the Renewable Fuels Assn. Higher corn prices are already rippling though the economy, lifting prices for soybeans and other crops, and products like tortillas. Next could be meat, poultry, and even soft drinks. Chicken producers estimate that the industry’s feed costs are already up $1.5 billion per year. ‘Ultimately, these increases will be passed on to consumers, and we could have a fairly dramatic inflation scenario for food costs,’ says William Lapp, president of consultant Advanced Economic Solutions.
“Is all this really so bad? Pessimists, in fact, are a minority in debates about food vs. fuel. Lapp notes that food is now at its cheapest level, historically. ‘It’ll be easier to pass on the food increases because we’re spending a smaller portion of our disposable income on food than in the 1970s,’ he says. And some experts even argue that a boost in food prices could be beneficial to Americans’ health. A doubling of corn prices makes corn syrup more expensive, lifting the price of a bottle of soda by 6 cents, calculates David Morris, vice-president of the Institute for Local Self-Reliance in Minneapolis. That might lead people to consume less. ‘If Americans reduce our input of sugar, we could make 2 billion more gal. of ethanol and help overcome our obesity problem,’ he says.
“And while grocery bills could rise modestly, higher agricultural commodity prices are a boon in many ways. Corn farmers are having a rare period of prosperity, and the federal government is getting a break. In 2006, Uncle Sam gave corn farmers $8.8 billion in subsidies. Thanks to high corn prices, subsidies are expected to drop to $2.1 billion in 2007. ‘All the price-dependent spending is getting wiped out,’ explains the USDA’s [Chief Economist, Keith Collins.]”
Lauren Etter, writing in Saturday’s Wall Street Journal focused on how market developments are impacting Archer-Daniels-Midland (ADM).
“At an analysts meeting last November, Archer-Daniels-Midland Co.’s new chief executive, Patricia Woertz, warned there might be turbulence ahead as the ethanol market heated up. The company’s earnings report this coming week will offer the latest sign that she was right.
“Corn prices have been flirting with $4 a bushel — climbing toward record levels — and oil prices have dropped 9.2% since the beginning of the year. That isn’t great news for Ms. Woertz, who came to ADM last April trumpeting biofuels as an ‘exceptional opportunity’ for the company and promptly put more of the company’s money into renewable fuels. The company’s stock has slipped nearly 30% since the end of the summer driving season, when ethanol consumption is at its peak.
“The consensus on Wall Street is that ADM will report earnings of 64 cents a share for the fiscal second quarter ended Dec. 31, up 14% from a year earlier, driven by higher ethanol profits. But down the road, one of the largest variables ADM will have to contend with is high corn costs, which not only could drag down profitability in the company’s ethanol business, but also could hit its high-fructose-corn-syrup business, as well.”
Ms. Etter added that, “ADM is counting on farmers to ramp up corn production, which could keep corn prices from rising even further.”
Mark Steil, of Minnesota Public Radio noted on Friday, that many farmers are planning on doing just that: “Doug Albin is still wrestling with the final number, but he says he’ll definitely plant more corn when the weather warms.
“‘I will probably take and put in maybe a 15 to 20 percent increase in corn,’ says Albin. ‘I don’t know if I’m typical of the rest of the farmers in the area, but I know a lot of them are looking at more corn,’” the report noted.
And DTN writer Aine Gianoli reported on Friday (link requires subscription) that, “Pitting analysts’ predictions against farmer surveys, the season of pre-planting predictions is well underway with corn numbers causing the most controversy.
“Farm Futures magazine added fuel to the speculative fire Friday with the results of its 2007 planting intentions farmer-based survey, which pegged corn acres at 88.4 million, a 10.1 million increase from 2006’s 78.3 million acres and exceeding one of the higher estimates from a prominent analytical firm by nearly 1.4 million.
“Though the size of the 2007 corn crop is expected to increase significantly this year in response to high corn prices and ethanol-driven demand, a 10-million acre increase would place acreage at its highest in 60 years.
“Private analytical firm Informa Economics released a client-based estimate of 85.6 million acres Jan. 19. Allendale Inc. released a research-based estimate of 87.02 million acres Jan. 20 and will release a grower-based number March 2.
“This month USDA Chief Economist Keith Collins said corn acres could rise as high as 86 million, citing farmer planting intention surveys. USDA will release its official estimate in the March 30 planting intentions report.”
Chris Kraul, writing in today’s Los Angeles Times, explained that not every investor in biofuels is building a corn ethanol plant in the Midwest.
The L.A. Times article stated that, “At a ceremony this month, energy firm Maple Cos. closed a deal to buy 25,000 acres of unused and heretofore unwanted land near the city of Piura, [Peru]. The Dallas company announced plans to invest $120 million in an ethanol processing plant, a sugar-cane field to provide raw material for the fuel and a mile-long underwater pipeline to the Pacific Ocean to deliver fuel to tankers and onward to U.S. customers.”
And with respect to an eventual equilibrium in resources flowing to biofuel production facilities, Patrick Barta noted in today’s Wall Street Journal that, “These analysts see an analogy in the dot-com bust of 2000. The bust cleared out some of the worst ideas and least-efficient companies in the tech arena, allowing deeper-pocketed investors to consolidate operations and emerge leaner to make the Internet an even more powerful force in the world economy.
“They believe a similar scenario will play out in the alternative-fuels market.”
The Journal noted that, “There are indications that a shift toward more-sustainable investments is already taking place, as some serious investors channel their spending to energies that either produce less environmental fallout — such as solar or wind power — or to agriculture-based options that don’t require as much water or compete with traditional food crops.”
However, the article added that, “Still, the newer alternative-energy sources have their problems. It will likely be years before sources such as jatropha or biomass will be economically viable on a meaningful scale, and it’s possible much of the current wave of investment in such technologies will yield losses.”
Policy makers will continue to keep a close eye on the energy related market dynamics in the agricultural economy as multiple factors continue to play out. Determinations regarding production allocations decisions, future prices and food inflation will be key elements in formulating appropriate policy parameters in the next Farm Bill.
In addition to news articles and editorial opinions from Op-Ed columnists and newspaper editorial boards, experts at our land grant universities will also need to weigh in with objective analysis regarding the longer-term costs and benefits of popular political proposals conerning the use of food for fuel.