WEBVTT

NOTE The Broader Risk: Exploring the International Ramifications of American Corn-Ethanol Policy

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My name is Luca Hickman, and today I'm going to be discussing the broader risks of our corn ethanol policy.

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And I must confess, I think they didn't really know where to put me, so they just sort of shoved me in this group.

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But I assure you, if you just give me your attention, I can tell you some things that are going to be very interesting and also very upsetting.

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First, I want to give you a topical preview. The first thing we're going to talk about is egg-flation, and I'm going to define that in just a moment.

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Then we're going to ask the question, what is ethanol?

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Then we're going to talk about something called the food versus fuel debate.

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And this is something that's very, very important and very, very timely

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when you're discussing ethanol policy.

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Then we're going to talk about riots and demonstrations,

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and you'll understand that a little better in a few moments.

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And then I'm going to make some predictions,

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and I won't give you any dates or numbers, don't worry.

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But first, I want to just give you some background about who I am,

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Who I am, how am I qualified to speak? I'm actually not an economist, I'm an engineering

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student. And that gives me a perspective about a policy like alternative energy policy that's

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a little bit different than you might expect from an Austrian Scholars Conference. I began

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studying this in mid-2007, so I've been doing this for several years, and I've written a

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book called The Ethanol Myths and this presentation is an adaptation of portions of this work.

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And I would also say that my interest in Austrian economics was first started when I heard Ron

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Paul talking about it when he ran for president. And so I'm sort of new to this school but

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the more I learn the more I am enjoying myself here. So I thank you for welcoming me into

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this group.

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Now, agflation defined. The first thing we have to do is say, what is this word? It is

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It is inflationary pressure induced throughout the macroeconomy by rising agricultural commodity prices.

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That is what I mean by agflation.

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Now, it's dramatic and has far-reaching effects.

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If you think when oil prices go up, it makes a difference for everybody.

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Think about food. Everyone needs to eat.

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And if food prices go up 5%, what does that do?

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Well, what happens when they go up 50%?

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It's capable of severely damaging an economy's natural balance.

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Once you make food significantly more expensive, the entire machinations of the economy can

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fall apart.

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Now, you might think I'm being a bit overdramatic, and perhaps I am for the United States,

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but as soon as you get out into the world and you start getting into nations where food

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will take up 50% of the budget at normal prices for an individual, what is a doubling or tripling

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So now, who here has heard of the law of supply and demand? No hands, really.

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I want to give you guys a little quiz because I'm sure you're all familiar.

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This is a price chart. We have a commodity, commodity X, and we have time.

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Now, I want to ask, why is price up?

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Now, A, supply increased, B, the supply decreased, C, demand increased, or D, another bailout

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package just eroded the value of the dollar even more.

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Now this is very subjective, right, it could be several things.

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Supply could have decreased, demand could have increased, and quite frankly, Mr. Bernanke

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could have had his way again, but I think we can all see that supply and demand would

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Now here's a second little quiz. Here is a graph of the acres of a commodity planted

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in millions in time. We can see a very big shift here. What will this do to price? A,

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price will increase. B, price will decrease. Or C, another bailout package just wrote the

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I'm not sure if this has anything to do with prices, but I'm pretty sure that's going to happen as well.

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Price will decrease, bailout package will pass, but we can say that price will not increase.

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But you know what's interesting? These graphs are actually for the same commodity, and this is actually real data.

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This is the price of corn, and this is the amount of acres planted in the United States in corn.

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So as we see here, when corn prices went from about $2 to about $6, the supply did this.

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Why? It has to be a rapid and very, very powerful change in demand.

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This is the only thing that explains this.

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And I want to tell you this, this is not isolated. This is a price for flour.

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This is a price for rice, uncooked rice. This is the price for chicken. What is this? Milk.

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I've got plenty of these, don't worry.

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Frozen turkey. Now you can see the turkey is always cyclical, right? Around November the price plunges. You can see the trend is clearly upwards.

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Beef.

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Why?

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This is not just corn. This is not just flour, not just rice. This is food. Food is increasing dramatically in price.

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Now, we know, at least for corn and for other crops as well, that a changing supply is not really the problem. Supply is going up.

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So we can say it's caused by change in demand. We also know it's widespread and massive, and this is really unprecedented.

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Unless you're going to get back into biblical days with Joseph in Egypt, I don't think we've seen price increases in grains like this.

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this we really have and I think we can safely say that something is causing this

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it's really external to the market ie it's not a business it's not a group of

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people I think it's the government and I'm very very confident in my saying

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that American corn ethanol policy is really to blame for a lot of this so we

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talked about agflation now I want to talk about what is ethanol because most

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Most of us here are economists, we're not necessarily familiar with what ethanol is, it's a chemical, it's an energy, let's talk about that.

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Ethanol is also known as grain alcohol. So basically you take a corn-based mash, here in the United States, and you ferment it like you would to make whiskey, and then you burn it in your car.

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Pretty simple, right?

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And this here is a picture of an ethanol refinery and the reason I included this is

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You wouldn't believe how many people think it's of some sort of still in grandpa's backyard

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This is massive business ladies and gentlemen

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Ethanol industry support

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I don't have a problem with ethanol, I really don't. If a private corporation wants to manufacture ethanol because the market wants it

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Let them. I think we're in agreeance, we like the market here. My problem is that

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the government is supporting this and my problem is that without that support, I

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guarantee you this industry would not exist. So they get a 51 cent per gallon

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subsidy. That means if you make one gallon of ethanol, the federal government

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will give you 51 cents. If you make one billion gallons of ethanol, the

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The government will give you $0.51 times $1 billion. $0.54 per gallon tariff. See, in Brazil and in other countries, they can make ethanol a lot cheaper than we can here.

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So what does the government do? They put a tariff on it, of course. Make it so that it's uncompetitive.

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And then, of course, we have the mandates. Millions and millions and millions of gallons of this fuel are mandated for usage in the United States.

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We have an industry where their competitors are non-existent, they get support from the government, and then the government tells us we have to use their product.

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I think for being in engineering, I'm in the wrong business.

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So this is a pie chart about alternative fuel funding. These are the two biggest fuels in the United States, alternative speaking, ethanol and biodiesel.

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Corn ethanol is this one. It receives 79% of the government funding.

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Now, I could have talked about biofuels, but that's such a large topic, I said, let's go right to the source.

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Let's talk about ethanol. It is clearly the focus of the government.

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There's an average, folks, of $6.3 to $8.7 billion per year, from 2006 to 2012, this is predicted,

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that will be given to the ethanol industry in this country.

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And since 1996, they've received 30 billion of your dollars.

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Do you understand why I'm getting a little upset and I can probably flush in the face and everything?

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Now who supports ethanol? I think we need to understand. I've got some people laughing already.

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I think we have to ask ourselves, why is this being supported? Who's pushing this through?

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So let's ask, oh okay, ethanol reduces our dependence on foreign sources of oil and is

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an important weapon in the war on terror.

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By investing in South Dakota's ethanol producers, we will strengthen our energy security and

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create new jobs.

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U.S. Senator Thune.

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But we must take other steps, such as increasing conservation, developing an ethanol industry,

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etc.

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Congressman Bobby Jindal, I saw him on the news recently, he's apparently the poster

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We should increase our development of alternative fuels, taking advantage of renewable resources

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like using corn and sugar to produce ethanol.

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This is not a one-party issue, this is very, very much bipartisan, very much.

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By furthering the use of ethanol, farmers are presented with the opportunity to produce

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a cash crop by collecting their agricultural wastes.

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Dick Lugar, I didn't realize corn was an agricultural waste.

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Did anyone else notice this? I thought it was a fool. Not according to Senator Lugar.

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Everything about ethanol is good, good, good.

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Senator Grass, you know, we can just stop here. It's good. American farmers, by

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making the commitment to grow more corn for ethanol, are at the tip of the spear

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and the War Against Terrorism.

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This man was the former head, the former head of the CIA.

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The CIA is telling us that if we just grow more corn,

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we'll be safe.

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I don't know why they don't invest in fields, but okay.

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And then I got a nice little video here.

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I'm not sure if the volume will be sufficient.

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You can hear.

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Oh, okay, okay.

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Well anyway, well it was President Bush who stated the Union Address in 2006 and basically

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what he says is we need lots of ethanol.

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We need ethanol because it's going to make it safer, it's green fuel, it's going to

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all these promises.

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And it's interesting that if you remember those price charts I showed earlier, when

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did prices start going up?

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About 2006.

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When did the supply of corn skyrocket?

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Why did we have the largest corn harvest in history? 2007, the next year.

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I'm sure it was just a coincidence, right?

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So we've talked about agglutination, we've talked about what is ethanol.

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Now we have to get to the meat of my presentation today, food versus fuel.

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I would like to show you a comic, just take a second and take a look.

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The caption says, your child is hungry, my SUV is ravenous.

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I can't help you and it's it's sort of humorous but when you think about it

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it's also very sad and upsetting because this is what I'm talking about there is

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a finite supply of food you can grow it year to year you can plant more of

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something but two there's a finite amount of irritable land and the question

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is when you're converting our food into fuel and then burning it what is that

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doing to people around the world that are poor. Now this is ethanol production capacity

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by year, 1999, 2000, going, going, going, starts going up quite rapidly. Now this is

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the total number of ethanol plants by year, also going up, but that's not really a very

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good indication of what's going on on the month to month a year by year, because it

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takes time to build ethanol plants. If you really want to understand how the

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government's support for this industry has been growing, we need to look at the

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number of new plants being constructed and the number of existing plants

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increasing their capacity, expanding their facilities.

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Uh-oh, that's this. So we've got President Bush's speech here, boom, the next year.

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And we're already seeing problems with this. What happens when these plants start coming online soon? What happens when they start reaching their full capacity?

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Now this is an interesting chart. This is where we put the existing capacity next to what they're adding on here from these plants.

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You can see here that the blue is the existing capacity, the black is what they're adding on right now.

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So if the 2008 numbers really aren't in yet, but if you just kind of add that on top of it.

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Do you see the problem?

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Do you understand the scope of this?

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Now let's put this in human terms.

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510 pounds of corn are required to make 13 gallons of ethanol.

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510 pounds of corn.

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Well, put it in human terms, that's enough to feed a starving child for a year,

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in any one of a number of countries.

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Now you might say, well, Luca, this is field corn, not sweet corn.

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Do you think farmers who are usually planting sweet corn might switch over to field corn?

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Do you think if they weren't growing so much field corn, maybe they'd plant sweet corn?

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I mean, after all, isn't the equipment the same?

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The same tractors, the same processes?

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And so I made this graph here.

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This is ethanol capability in millions of tons of food.

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We can talk about gallons of ethanol, but if you actually want to talk about it in human terms,

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this is how many millions of tons of food we're burning every year.

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To put it simply, there's a finite amount of irritable land.

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We understand that.

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In 2008, ethanol consumed a full third of America's corn harvest.

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A third of it.

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And substitute goods and production displacement, remember production displacement,

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if you're growing corn on this acre of land, you can't grow wheat there.

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These are causing a dramatic shift from corn demand to trickle into other commodities.

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Why is the price of wheat going up? Because farmers are planting more corn and less wheat.

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As a whole, the result is that food prices rise enormously.

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So we've talked about agflation, we've talked about what is ethanol, and we've talked about this food versus fuel debate.

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Now I want to move into something interesting called riots and demonstrations.

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Two quotes first. We heard, you heard from Aristotle this morning, poverty is the parent

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of revolution and crime. Just think about that. Poverty is the parent of revolution

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and crime. And then I had to throw in another fine gentleman, because I knew he would be

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underrepresented here, Vladimir Lenin. A revolution is impossible without a revolutionary situation.

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If there is one area I would count on Lenin to understand, it's how to overthrow a government.

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And that's about it.

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A revolution is impossible without a revolutionary situation.

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If the price of food goes up enough, do you think that might cause a revolutionary situation?

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Wasn't there something in the French Revolution about, let them eat cake, they couldn't afford

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bread?

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Wasn't there something about this peasant revolt that Lenin was the head of about not

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So what is the broader risk? The U.S. is the world's biggest grain exporter. We export more grain than Canada, Australia and Argentina combined.

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In fact, Iowa alone harvests more corn than all of Canada, and we just took a third of

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our crop and burned it.

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So when we're the number one exporter of grain in the world, what starts to happen

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when that grain goes away?

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The broader risk.

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Let me tell you something else.

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Did you know that more than 20 nations have corn-based diets?

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Did you know that? More than 20 nations.

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Corn is their staple crop, and we're burning it.

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I'm sure that won't...

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Mexico. Mexico's an example.

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I believe the average Mexican gets 40% of his or her daily protein intake from corn-based products.

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To tortillas.

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No, well that's why 75,000 people demonstrated in Mexico City when the price of tortillas rose 400 percent.

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This is real, this is what I'm talking about.

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The broader risk is very, very crucial to understand from a policy perspective as well as from an international relations perspective.

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And many of these countries, like Mexico, they're impoverished and they're

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politically unstable. This is a great cover from The Economist, it's called The Silent Tsunami,

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The Food Crisis and How to Solve It. Now I'm not sure they got it completely right but they

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did identify our ethanol policy as a very big problem. But the thing about this cover I don't

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like is silent. It's not. There have been riots, demonstrations and protests in Egypt. I'm sure these

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police are just escorting this gentleman somewhere. Burkini Faso, Haiti. In fact, this is the first time

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This is the first time in the 21st century that a government collapsed because of food.

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They kicked the president out of office.

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First time. Bangladesh, Senegal.

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In fact, in the past two to three years, food riots have erupted in more than 20 nations.

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There have been everything from the tortilla crisis in Mexico to pasta protests in Italy, people protesting all over the world.

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Here's a great map. See these countries in red? These have been places where you've had food protests or food riots or food-related demonstrations in the past two or three years.

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This is a burgeoning threat. This is the beginning.

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If you remember our ethanol capability graph from earlier, you'll see that the potential for more and more ethanol is only growing.

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As this happens, what happens to these nations? We're going to see a lot more red?

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So lastly, before I leave, I want to just take a look into the future just a little bit.

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Try and understand where we might be heading with this situation.

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I think that unless something changes, we're going to see greater subsidies.

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Now, you say we're giving tens of billions of dollars.

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You think there are going to be more subsidies? Absolutely. Absolutely, I do.

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I think there's going to be greater mandates.

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We've had cases already where governors have asked the EPA to waive mandates

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Because of what it's doing to the agricultural sectors in their states.

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What am I talking about? Take Texas, ranching country.

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What happens when the price of corn goes up? Can ranchers still feed their cattle?

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Governor of Texas asked the EPA to waive mandates. EPA said no.

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There's going to be more.

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Prolonged tariffs. The tariffs we have on imported ethanol will eventually expire.

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They're going to be prolonged.

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And here's a wonderful video, and I really, I see there's an image, so I'm hoping it's going to work.

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This is our new president, and it's a series of clips about his position on ethanol, just because I wanted to be an equal opportunity offender here.

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And I think you'll agree that the future doesn't really look that good if it plays, which, oh no, not another video of mishap.

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Okay, essentially, I watched the video several times so I think I can do this one, essentially

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he explained that he's from Illinois, which is a very large corn producing state, number

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two in the Union, behind Iowa, and he said, well naturally I'm for ethanol, it's been

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great in our state, right, corn farmers are loving it, you know, I'm sure that things

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like having Archie Daniels Midland, the world's largest ethanol producer based in your home

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No mistake doesn't hurt either, but I'm sure that didn't have an impact.

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And then that clip, I really wish it would have worked because it finished up with a woman that he's just picking to go into his cabinet talking about the need to expand ethanol production upwards of around 60 billion gallons a year.

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Now I don't know if these people ever ran the numbers, but they realized there's not enough corn in the United States to do that, but that doesn't matter.

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There's not enough corn to feed the world right now the way we're burning it, so a little less.

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So finally, we talked about egg flation.

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We understand that when prices rise in agriculture significantly, I'm not talking one to two percent,

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I'm talking doubling, tripling, quadrupling.

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When these things happen, the ramifications in our economy here are immense.

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We talked about what ethanol is.

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It's a fuel that's based from food.

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Now there are new ethanol being developed, cellulosic ethanol, ethanol from seaweed, from trees, I'm sure that won't hurt our forests at all,

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but the problem is those things have been being studied since the 70s and no one's been able to make them commercially viable yet.

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Not that ethanol is, I mean once you reduce, once you get away with the subsidies and the mandates you find out it can't compete either,

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but at least it has some glimmer of hope.

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When we talked about food versus fuel,

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we understand that when we're converting

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our food supply into fuel,

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this has some very significant ramifications

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in the form of riots and demonstrations.

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I said, we have higher food prices here

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And I don't want to diminish the significance of that, but let's face it, we have enough money that we're not going to necessarily starve to death as a nation.

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But we've already seen riots and demonstrations all over the world, and let's ask ourselves.

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We're giving billions of dollars to nations like Egypt to keep them afloat, because we want them to be stable for our strategic interests.

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at the same time we're proposing and promoting this policy that's doing the

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exact opposite it's undermining their government structure what happens to our

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security here when a nation like Egypt collapses or when a nation like Mexico

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right at our border already infested with a drug war I don't think they can

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win what happens when their people start rioting are the police going to be able

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I'm not sure what the resolution to this is. I hate to end on a down note, hey guys, this is sort of a bad policy, but I'm not sure what the future will hold.

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Unless something changes, I can tell you that it will get worse, significantly worse.

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So thank you, and that says, ask questions, I guess we're going to ask questions at the end, so please hold your questions.