Did the US ethanol mandate contribute to the Egypt crisis?

By Dave Juday

Farm Futures magazine, in an article “Ethanol is Not to Blame for Egyptian Riots,” notes “as the unrest in Egypt continues and spreads, several theories are surfacing as to why the riots are happening. Bob Dinneen, president and CEO of the Renewable Fuels Association says don’t blame American ethanol production.” 

Moreover, the article attributes to Tom Buis, the leader of another ethanol lobby group, Growth Energy, the notion that current Egyptian and Middle East unrest is a product of “40 foolish years of leaving our economy in the hands of OPEC, leaving our economic and national security in the hands of the Middle East.”

The cure, according to Buis, is more ethanol.

“We have an alternative in American ethanol. What this country needs is an energy policy that gives Americans a genuinely free and open market, so alternatives like ethanol can compete against oil.”

The proposition that the ethanol industry is seeking a free and open market is mind-boggling. In the words of two unlikely allied US Senators – Senators Tom Coburn (R-OK) and Dianne Feinstein (D-CA) – written in a letter to other Senators late in 2010:

“Historically our government has helped a product compete in one of three ways: subsidize it, protect it from competition, or require its use. Only with ethanol does the U.S. government do all three.”

Dinneen asserts of ethanol’s demand on grain, “US ethanol production demand represents just 3 percent on a net basis.”

Those figures are in dire need of context. US ethanol is projected to use 35 percent of the US corn supply in 2011. Moreover, US ethanol will use 12 percent of the world corn supply.

To be sure, as Dinneen notes, world corn supply is growing. The world supply of corn today is indeed growing due in large part to the demand imposed on the market by the US ethanol mandate. Since 2004, the year before the US had ethanol mandates, world corn supply has grown 32 percent.

But, in part, that corn supply growth has come at the expense of wheat supply. World wheat supply, since 2004, has dropped 20 percent. Egypt is the largest importer of wheat in the world.

A good perspective on the role of agricultural commodities in the Egypt situation was recently provided by Wall Street economist and host of the business show, the Kudlow Report, Larry Kudlow who wrote:

“Decades of autocratic government and a lack of free elections are, of course, the main drivers of the political upheaval in Egypt. But did the sinking dollar and skyrocketing food prices trigger the massive unrest now occurring in Egypt – or the greater Arab world for that matter?”

Of Fed Policy, Kudlow says:

“Commodities are priced in dollars, and the Federal Reserve has been overproducing dollars for more than two years. Consequently, emerging markets throughout the world – and the food sector in particular – are suffering from rising inflation.

“The CRB food index is up an incredible 36 percent over the past year, including 8 percent year-to-date. Raw materials are up 23 percent in the past year. Inflation breakouts have occurred in China, among various Asian Tigers, and in India, Brazil, and other Latin American countries. Even Britain and Germany are registering higher inflation readings.

“In dollar terms, the price of wheat has soared 114 percent over the past year. Corn has surged 88 percent. These are incredible numbers.”

Note Kudlow’s observations about wheat and corn prices. Wheat supplies are smaller – it’s not surprising that prices are up. But corn supplies are actually larger – and yet prices still skyrocket. Would that be the case if there was not a mandated demand for corn to be put to use in ethanol in the US, the world’s largest corn producer and exporter?

Of ethanol, Kudlow notes:

“To be fair, not all of the food inflation can be blamed on the Fed. A good part of this problem can also be placed at the doorstep of bipartisan U.S. policies to subsidize ethanol.

“According to the Wall Street Journal, in 2001, only 7 percent of U.S. corn went to ethanol. By 2010, the ethanol share was 39 percent. So instead of growing wheat, our farmers are growing corn in order to cash in on ethanol subsidies. Egyptians who can’t afford to buy bread and have taken to the streets in protest might be very interested to know this.

“Not even Al Gore still believes that ethanol provides any environmental benefits.”

To paraphrase Shakespeare’s Hamlet, “the ethanol industry doth protest too much, methinks.”

 

Dave Juday is a commodity market analyst and principal of The Juday Group who also serves as a CFACT policy analyst.

 

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