Price controls, ethanol, & food

[Knighted]

Greetings,

I've been studying economics recently. The first book I read that I was heavily influenced by was Henry Hazlitt's "Economics in One Lesson." The book makes a strong case for the libertarian/conservative view point on the economy. However, there are a few problems that have come up in my mind relating to social issues after reading it that i'm trying to figure out and come to terms with.

First is the issue of food as it relates to our current situation today with ethanol. Suppose that we had an entirely free market at work and oil skyrocketed to $200+/barrel and beyond (which might not be too far in the future.) As oil goes up ever higher, so does the demand for ethanol and ethanol fueled autos as a substitute. Now, apparently there is currently more of a profit margin to be made by farmers selling corn to the ethanol producing industry than to the food market since ethanol production has taken off quite a bit. With our corn supply being turned into fuel, added with the fact that farmers are now planting more corn instead of other crops due to the better profit incentive in it, we have a situation where food prices across the board are going up considerably - meat, corn, other crops that are being replaced with corn, etc. (although I realize growing demand in other countries is responsible for this also)

In many cases, the poor are unable to choose whether or not to drive regardless of high gas prices due to work distances. But they shouldn't have to choose whether or not to eat as well. The question in this scenario that I find myself asking is, would it not be appropriate for the government to intervene and either ban/limit ethanol production from food sources or to implement some other method such as subsidizing to help keep food prices lower? No matter how I try to rationalize this, I can't see it being possible to let free market forces reign in this scenario without it resulting in the starvation of the poor class. Do better alternatives exist that do not involve government interference in the market?

 

[Fox McCloud]

you're missing one major point here, and that's the corn lobby--the corn lobby has been able to get massive government subsidies to make corn more profitable to sell as fuel, as oppose to food--not only that, but the government is also subsidizing the ethanol plants as well....the end result is that it's much much more profitable for a farmer to grow corn for ethanol as oppose to growing corn for food.

if there were no subsidies and we had a free market, farmers likely wouldn't do this, and they'd probably grow hemp or some other crop for ethanol (remember, all crops are legal since this is a totally free market). As it stands, corn is one of the poorest crops for making ethanol out of (yield per acre), and it has the highest CO2 output as well (not that I believe CO2 causes global warming, I'm merely pointing out the fallacy, from anyone's perspective of subsidizing corn for ethanol).

What's so ironic is that it was the enviro-nuts who wanted this in the first place, but now they act like they didn't have anything to do with it, and it's the absolute worst thing ever.

 

[Mahkato]

Oil will have to go a lot higher, or the tech improved considerably, before ethanol is a better deal, if you take out all of the government intervention artificially lowering the price.

 

[SLSteven]

you're missing one major point here, and that's the corn lobby--the corn lobby has been able to get massive government subsidies to make corn more profitable to sell as fuel, as oppose to food--not only that, but the government is also subsidizing the ethanol plants as well....the end result is that it's much much more profitable for a farmer to grow corn for ethanol as oppose to growing corn for food.

Exactly! Before the subsidies people ate corn and burned gasoline.

 

[Zippyjuan]

In a free market situation (no subsidies on ethanol) it would still be too expensive to produce at current oil prices. Both the cost of producing ethanol from corn is high and the energy yield very low so it may be questionable that we would choose to make energy from it in a free market situation- the only reason for the market today is due to the subsidy.

 

[danberkeley]

The question in this scenario that I find myself asking is, would it not be appropriate for the government to intervene and either ban/limit ethanol production from food sources or to implement some other method such as subsidizing to help keep food prices lower? No matter how I try to rationalize this, I can't see it being possible to let free market forces reign in this scenario without it resulting in the starvation of the poor class. Do better alternatives exist that do not involve government interference in the market?

That's like the government coming to you and breaking your leg. Then the government gives you a crutch and says to you, "see, without us you wouldn't be able to walk." It is the government's fault that prices are high. inflation is forcing oil producers to raise the price in terms of US dollars. Compared to gold (real money), oil is only up 5-10%.

 

[danberkeley]

Exactly! Before the subsidies people ate corn and burned gasoline.

Now we're going to burn corn and eat gasoline!

 

[Knighted]

Thanks for the replies. I wasn't aware of the federal government's hand in creating this mess.

I know in my own state, Missouri, our good governor Blunt deserves part of the blame for this due to his mandate that all gasoline sold in the state must be E-10 (10% ethanol mixture) as of this year. The best part is that the governor's brother owns an ethanol plant that was started up around a year before the governor's ethanol mandate.

An article on this:
http://www.zimbio.com/Governor+Matt...6/MO+ethanol+mandate+cost+consumers+1+billion

Quotes:
"That mandate requiring all gasoline sold in the state to contain 10 percent ethanol went into effect earlier this year and, according the report, will cost Missouri consumers $1 billion in the next decade."

"Most of the increased cost of ethanol is a result of decreased fuel efficiency and taxpayer funded credits paid to the ethanol industry. Both of these substantial costs were omitted from a study released earlier this year by the Missouri Corn Growers Association that praised ethanol as an economic benefit to the state."

 

[Knighted]

Suppose that we had a free market, though, and that the government hadn't interfered and caused an ethanol boom. Under a functioning free market, could we not reach a point where oil is so expensive that corn, as a substitute, is simply more profitable to be sold as fuel than as a food?

Even if corn wasn't used, if it was much more profitable to grow some other crop that could be used as a biofuel, land being used currently for corn and other food crops might be replaced, resulting in a shortage of food supplies, resulting in higher prices.

Is this a plausible outcome? What would remedy such a situation short of some sort of government intervention?

 

[Acala]

marginal utility

First of all, food is going to trump fuel in the free market always and forever. You can live without fuel but not for long without food so the demand for food on the margin is going to ALWAYS beat the demand for fuel and so the farmer will always find food more profitable to produce in a free market if there truly is a food shortage.

Second. There is no way to predict what a free market in energy would look like based on what we have now. There are so many obstacles, regulations, subsidies, price controls, taxes, wars, interventions etc. that the energy situation now is a twisted monster. All you can say with certainty about a free market in energy is that it will allocate resources to meet the demand of the people in the most efficient way possible in the order of aggregate preference. Nobody can say what it would look like exactly. But you CAN say that enough food to survive is always going to be very high on the list of preferences.

 

[Knighted]

But does food trumping fuel still apply in reality when there are large income disparities in the population?

Let me propose a scenario as i'm trying to reason this through for myself. Suppose gas goes to $10/gallon, and lets pretend that cars running on ethanol or gasoline get the same MPG in order to simplify this. Ethanol producers know that they can purchase corn from farmers and turn it into ethanol for much less than $10/gallon. If the producers can sell ethanol at a lower price than gas, ethanol will be far more attractive to consumers filling their tanks. As demand grows, ethanol's price will presumably move towards gasoline's price as a lot of corn and similar crops are used for fuel with only a limited supply of crops. People filling their tanks will not think twice about the food supply.

Meanwhile, the price of many foods will rise, because of fairly constant demand for food and a much diminished supply of relevant foods. Supply will dwindle, and as it does, food prices will rise to a point where it is more profitable for farmers to sell their crops to consumers than to ethanol producers. This is the main point of emphasis. Food exists, yes, but food prices are higher as a result of ethanol - a lot higher. This might not affect the upper middle class too greatly, as they have more disposable income than the poor. It certainly won't affect the rich at all. But it will definitely affect the poor. With prices so high, the poor will definitely suffer, and probably would end up substituting the corn and other crops with other foods, neglecting important nutritional needs in the process. In a really extreme case, it seems possible that the poor could starve or have to resort to handouts for food.

In light of this, can you explain what market forces in a free market would prevent this scenario from occurring, assuming no government intervention was allowed?

 

[theoakman]

the thing to take home is that if oil went up as far as you feared, we would be forced to turn to alternative fuels other than ethanol. Transportation did exist before the internal combustion engine. If oil truly went up that much, it would be cheaper to go back to 1800s type trains and such. That means, the oil price will be set by the market. Ask yourself this, how many people in China owned cars 20 years ago? They survived. In fact, they've managed to build thousands of factories.