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Egypt, Ethanol and Armchair Punditry – Part I

February 3, 2011

           

The events in Tunisia and now in Egypt are truly historic.  For Tunisians and Egyptians on the ground, they are unfortunately also becoming issues of life and death. As the world watches these people struggle for control over the future of their nations, pundits in the Western media have taken it upon themselves to opine about the reasons for the unrest.  Some of the reasons are quite valid.  Rampant poverty, government corruption, and a true desire for a new government all seem to be fundamental underpinnings for the rioting we have seen. Unfortunately, not all pundits are sticking to the widely agreed upon root causes.  Rather, they are choosing to rehash their grievances with old scapegoats.  For too many, this includes blaming ethanol once again for rising world food prices.  As has always been the case, the facts on the ground don’t support the rhetoric in the air. It is an indisputable fact that grain and food prices worldwide have risen.  So, too, has the price of oil – well before the current turmoil in the Middle East.  The causes for rising prices are very familiar to those that follow the markets closely.  Worldwide demand is strong for all grains, including corn, wheat and rice.  Wild weather in key grain-producing regions has injected doubt into the ability of these regions to maintain and increase their output this year.  Some nations, like Russia, have implemented export bans of key grains, putting pressure on world prices and supply.  All of these factors have fueled speculators to drive prices of all commodities – grains, oil, metals – to questionably high levels in much the same way we saw in 2008. One factor not having the kind of impact many claim is U.S. ethanol production.  The use of grain in American ethanol production represents such a small fraction of global grain demand it is hard to imagine it is moving world prices and causing civil unrest in nations. In January, the U.S. Department of Agriculture (USDA) released its final estimate of U.S. grain production for 2010 as well as providing data as to global production and supply of grains.  According to this data, global supplies of coarse grains (think corn), wheat, and rice stood at more than 2.6 billion metric tons – just off records set in 2010. Of this near-record supply, U.S. ethanol production demand represents just 3 percent on a net basis.  Equally noteworthy, that 3 percent is of a growing supply of grain as farmers in the U.S. and around the world continue to produce more. Even the most ardent ethanol detractors would have a hard time justifying how a 3 percent market share could be the driving factor for rising food prices, and ultimately, the riots in Tunisia, Egypt and elsewhere. Often underreported or completely overlooked is the fact U.S. ethanol producers supply the world with a growing amount of livestock feed.  One-third of every bushel of corn used in U.S. ethanol production is returned to the market to feed swine and cattle herds and poultry flocks, including in nations like Egypt.  In 2010 alone, the U.S. produced more than 32 million metric tons of livestock feed – 9 million metric tons of which was exported around the world. Higher prices for grains, even if in an artificial market bubble, do send key signals to farmers worldwide about planting decisions for the upcoming seasons.  In the U.S. for example, farmers are responding to market signals to increase winter wheat plantings by 10 percent. Higher grain and food prices no doubt contribute to poverty levels in every country.  Economic concerns, as we have seen even in the U.S., can result in the population seeking new direction.  In the U.S., we are fortunate that direction is changed at the ballot box.  In other nations, such an option simply doesn’t exist.  And in these nations, a change of direction can result in the kind of turmoil and violence we are seeing today. Understanding the cause of such unrest is important.  But wild speculation and irresponsible assignment of blame, as is occurring in some corners with respect to global biofuels production, is not helpful.  As will be discussed in Part Two, the world will need biofuels to allow nations to become less dependent on finite supplies of oil and the economic turmoil such dependence invites.