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Sunday, November 25, 2012

The Unintended Consequences of Government Mandated Biofuel Consumption

Cross-posted from Consumer Energy Report

 Food Deficit

A recent article by George Monbiot explains one of the potential ramifications of diverting grains into fuel. Thanks to extreme weather around the globe:
 ”…this is also a year of food deficit, in which we will consume (31 million tons) more grain than farmers produced. If 2013′s harvest does not establish a new world record, the poor are in serious trouble.”
His main point is that thanks to a growing demand for food driven by an increasing population and improving standards of living, along with the conversion of grains into fuel, the world has to break harvest records every year to keep up. Thanks to grain reserves, humanity can weather years that don’t break records, but failing to break records for two or three years in a row means hunger for hundreds of millions because the price of food will spike as speculators capitalize on the fact that low supply relative to demand equates to higher prices. If weather extremes become more and more common, the odds of running out of reserves becomes more and more likely. (See more: Midwestern Drought, Ethanol, & Renewable Fuel Standard)

It is the prediction of things like mass starvation that help prevent things like mass starvation. This self-nullifying tendency is why a lot of predictions fail to materialize. Ignoring the prediction of massive traffic jams due to road construction could mean that you are the only one on the road because everyone else heeded the prediction, or it could mean that you are stuck in gridlock because you were not alone in ignoring it.

European Union Response

Finally acknowledging the fact that converting food into fuel exacerbates this potential, the European Union has begun the process of scaling back how much biofuel can be made from food. 

From Nature:
French President Francois Hollande last week called an emergency meeting of G20 agriculture ministers. They are due to meet in Rome on Tuesday (16 October) to consider a coordinated response to the sharp spike in food prices that has followed the worst US drought in decades. France is to put global biofuels production at the heart of the discussion.
Last week, a government spokesman told reporters after a French cabinet meeting that Paris “will push for a pause in the development of biofuels competing with food”.
Understandably, European farmers are not happy with this development because the conversion of food into fuel translates into higher grain prices, i.e., biofuel mandates create a chronic shortage.

United States Response

Here in the U.S., corn farmers who got enough rain are breaking out the champagne. Producers of corn ethanol and soy biodiesel are reducing production because with the price of feedstock so high, the more they produce, the more money they stand to lose. Not to worry. Consumption of their product is mandatory. They just have to hold on until blenders run out of credits (by blending more than legally necessary in some years, blenders earn credits that allow them to blend less at other times) and will be forced to pay what ethanol producers need to make a profit again. In the end consumers will pay for everything.

Today’s low natural gas prices (most energy in a gallon of corn ethanol is derived from natural gas as is the methanol used to make biodiesel) are not enough to offset the very high grain prices. (See more: Methanol versus Ethanol: Technical Merits and Political Favoritism)

Impact On Other Businesses

Because these record high grain prices are also hurting other industries that use corn and soy, the governors of eight states containing a lot of those industries are being lobbied to pressure the EPA to waive the mandate to blend ethanol, which in turn, concerns those who gamble for a living betting on the price of food commodities. A waiver of the mandate would release a lot of grain onto the market which would cause them to lose their shirts.

This of course, has all been said before. There are two differences this time around. One is the growing body of evidence of more frequent severe weather and its impact on agriculture. The other is the move by the European Union to reduce the use of food stock for biofuels.

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