Fuel and Biofuel

This morning's New York Times has an article I think everyone on this blog should read. It reports that food shortages around the world are growing dramatically in one particular area: food oil. I had no idea that the price of cooking oil was rising so rapidly in Asia. The particular focus of the piece is on palm oil, a staple of Southeast Asia. Apparently the demand for biofuels and the US cutback on "transfats" (the bogeyman du jour of American nutritionists, who used to promote margarine based on the same sort of poor science) has led to a massive diversion of production of soy and palm oil from food to fuel, causing soaring prices.

It was long thought that developed nations were constrained in their ability to consume the agricultural production of the third world by the number of calories their population could consume. (For the last 25 years, the US has seen that it is possible to increase the number of calories per person where government agricultural policies produce an excess of corn: it is made into high fructose corn syrup and sold at rock bottom prices. Obesity is the natural result). The growing tragedy in the third world is a new fact, that the food needed by the poor can now be sold instead as a consumable commodity with unlimited demand (energy) in the developed world. Previously in history, the only way for this to happen was to divert acreage from food production to other sorts of agricultral production, such as cotton, coffee, tea, or trees (or even opium and coca). But demand for such things never matched the demand for a commodity so fungible as fuel.

Of course, this is not to say that biofuels are bad. Biofuels were intended to spare the environment from global warming and the ill effects of petroleum-based economics. Unintended consequences can be horrid, however. Few dreamed that biofuels would literally take food out of the mouths of starving people, as now appears to be the case.

In "The Omnivore's Dilemma", Michael Pollan points out that we use a huge amount of petroleum in the form of fertilizer, and that this is what the "green revolution" was in large part about. In other words, we were previously eating petroleum products (in a memorable phrase, he says that food in the USA is primarily a "petroleum byproduct.") He make a compelling argument that biofuels produced through application of large amounts of petroleum-based fertilizer does little to reduce carbon emissions. All it really does is divert agricultural production. Our Iowan friend here can speak of ethanol. The US issue is not soy diversion, but corn diversion, btw. We don't see rising prices here for food, since the US was overproducing (for domestic consumption) anyway due to food subsidies. Corn prices are rising, but food prices remain rock bottom in US terms (fast food "value" meals have been priced at about $5 for more than a decade, despite a steady 3-4% inflation rate that has caused everything else to inch up in price by 30-50%). Of course, each such $5 "value" meal is priced far above what a couple billion poor people can afford.

What can be done? The conservative/libertarian/free marketeer answer is "do nothing." Or one could blame government programs in the developed world (and Brazil, for example) promoting biofuels for the problem. The "free market" answer is to suggest that if no government anywhere interfered with (subsidized or banned) any kind of agricultural production, the market would sort it out for itself.

That's wishful thinking. We cannot as a planet rely on a "free market" that would lead to sustained dramatically higher food prices for the poor. Imagine, for a moment, that food production drastically reduced in favor of biofuel production until prices finally rose for food high enough to make food production worthwhile as an alternative. That scenario, to which we are headed, is a disaster for the poor. Demand for food is relatively inelastic. We must consume a certain # of calories to survive, but can only consume so many calories each day per capita (note the obesity issue, above, an example of the, well, limited elasticity of the market). That demand must be satisifed for humanitarian, or at least political reasons. Hungry people are the major source of political instability in the world.

Unfortunately for the free market theologians, the solution here will require government action in addition to free market prices. Simply put, we must ensure that a certain amount of land is devoted to food production even though biofuel production would be more profitable.

The other problem, not addressed by the NYTimes, is that loosening of strictures on agricultural markets (i.e., free trade) means that, for example, a Mexican farmer who used to supply corn cheaply to his local market now grows tomatoes for export. This is already a problem in Mexico, as corn prices have risen and there have been little-publicized tortilla riots in poorer areas. That problem would grow worse if productive land in developed countries actually went fallow (or was devoted to specialty crops like fine cheeses or wine) for economic reasons, and we instead bought our food from poor countries. That would be, however, the natural result of eliminating subsidies on food production in th edeveloped world.

The problem is rather like the shame of a rich person cleaning out the Salvation Army Store because it is cheaper, leaving no clothes for the poor. Or middle class people taking government cheese. Such things would interfere with the intention to produce below-market goods for a segment of the population that cannot afford them. (Note that the Salvation Army prevents this, not so subtly, through shame and stigma attached to shopping there, and the government prevents it by making you wait on long lines and, again, feel shame and be stigmatized - while this hurts the self-esteem of those who must, it prevents the market from sucking up these underpriced goods). The failure of rent control is a similar problem, btw. The idea of rent control is to make sure that lower-income people can afford a home; that is severely perverted when high-income people (all over Manhattan) take advantage for themselves. The difference, of course, is that housing is not a consumable commodity like food. It is more like capital. But I digress...

The model that RBR has proposed for agriculture around the world - that poor nations would prosper by selling food to the rich who are selfishly insisting on producing their own through subsidies - reaches its limit where the poor nations need the food but are simply outbid, then left to starve. If we accept that the free market can lead to food prices above levels needed for subsistence, then we need to find some way to alter it.

The obvious solution to this problem must include, dare I say it, a form of agricultural subsidies in the third world and some trade barriers to prevent diversion of food production from domestic consumption to foreign export. Something must be done to ensure continued production of food at low prices for poor nations. Put another way, the highest and best economic use of the land is not, in fact, its highest and best social use. Where these diverge, the free market and the invisible hand cannot accomplish their magic. Are direct subsidies to the world's poor the answer, so they can participate in the market with more money in their pockets? Is that inflationary? My head hurts.

What are the Citizens' thoughts about this complicated subject?