Ethanol Madness Continues

In early 2007 I wrote this entry about Bush’s State of the Union speech in which he very unwisely staked our nation’s future on corn-based Ethanol (and Congress obliged with the Energy Independence and Security Act of 2007 [loud guffaws and tears rolling down cheeks at the title]).  Well it is no secret that all thoughtful people have reached the conclusion that it is in fact insane to require the levels of ethanol usage sponsored by our Solonic Congresspersons (cough, hack, cough) and our illustriously bad president.

Here is a little table I put together from data supplied by the USDA here (Select Table 8 – U.S.Corn).  Data prior to the 2006/07 crop year i am just recalling from having seen elsewhere.

Notice that we will be using one-third of all of the corn produced in the crop marketing year starting in just a couple of months.  ONE THIRD!  And if the crop is smaller than anticipated (this is the USDA long-range forecast from February 2008), the percentage will be even larger.  Given the flooding in the corn-growing ares the last week or so, and the poor start to the planting season, this is more than likely.  This is why July corn (old crop) hit an all-time nominal high of $725.50 today while December (new crop) hit a high above $7.50 per bushel.

These are amazing prices.  Today corn dropped 15 cents in the final 10 minutes of trade.  One hears that locals just sit with arms crossed in the pit, unwilling to trade this kind of volatility in corn, soybeans, wheat; farmers and other hedgers cannot hedge because their banks will not finance the margin costs.  In other words the market is broken.  The world has gone stark, raving mad!

This is both because of our absolutely insane government (in decreasing order of insanity – Congress, Executive, Judiciary) which prohibits drilling for new supplies of oil and gas where we almost certainly have scads of it, but mandates that we use billions of bushels of corn to make ethanol that nobody wants to use, and then also effectively prohibits the importation of cheaper better sugar-based ethanol from Brazil (54 cent per gallon import tariff).  And then they blame speculators when the price of everything they touch blows off the roof.

Bush has said that because ethanol represents a tiny fraction of our energy consumption, that the mandates to use corn for ethanol are not what is causing prices of food to rise.  Huh?  Classic political misdirection.  Yes, it represents a tiny fraction of our energy usage, but as the chart above demonstrates it represents a HUGE proportion of the corn crop.  That is a major reason why (there are many others) it is such an idiotic attempt at a solution to our energy and global warming problems!  Here is what the USDA has to say about it at this address in the section titled “Strong Ethanol Expansion Projected”:

Market adjustments to the increased demand for corn to produce ethanol extend well beyond the corn sector. Movements in relative prices trigger supply and demand adjustments for other crops. Higher feed costs affect the livestock sector, slowing increases in or reducing production of all meats over the next several years.

As the estimable Rick of CNBC (the guy who stands in the pit at the CBOT) has been warning, beware rising meat costs later this year.  We are about to return to a world like when I was growing up;  when it was a treat to have steak or pork chops.  Within the next 6 to 12 months prices of meats are going to skyrocket (most of the corn that isn’t used for ethanol is used for feeding livestock and poultry too to some extent, and when input costs spike, meat farmers slaughter their herds, so down the road there are very small herds, low supply , hence high prices).  Let’s see what the mood of the populace toward politicians is then.

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