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    Greater China
     Mar 15, 2011

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China's ethanol binge and corn hangover
By Peter Lee

America heedlessly exports revolution with its corn to the world. China, on the other hand, obsesses about the danger of shipping revolution with its corn from the country to the city.

To a large extent, communist China's economic policy has been predicated on a divergence of interests between rural producers (good prices for agricultural products) and urban consumers (cheap, stable prices for food).

The pendulum has swung back and forth from city to countryside, depending on where the most pressing national priorities - and problems - appear to reside.

With multiple examples of regime-ending urban unrest in the Arab

world, China's emphasis on contentment in the cities is not going to waver.

Currently, China's vaunted commitment to "food security" - the policy that China produce 95% of its needs domestically - looks more like an "urban security" policy ensuring low food prices in the cities than an effort to create a healthy, productive, and profitable agricultural sector.

For the past few years, rural incomes have stagnated as the cities have boomed.

The situation down on the farm, therefore, is pretty grim.

On the occasion of the National People's Congress, the Chinese media reported that a growth rate of 8.9% in per capita net rural incomes was achieved during the previous Five Year Plan. However, it also reported that living expenses had grown at a 7.8% annual rate.

On average, peasants now derive about half of their income from agriculture, the rest coming from other jobs including stints as migrant laborers.

In February, Xinhua reported that the ratio of average urban to rural income had almost doubled from the high point (for farmers) of 1983 of 1.83:1 to the current level of 3.33:1. [1]

On the occasion of Wen Jiabao's work report to the NPC, China Daily reported:
The price of wheat and corn, China's two major grain crops, increased 40 percent in the past decade, Zheng [Fengtian, of the School of Agricultural Economics and Rural Development at Renmin University] said, but agricultural materials such as fertilizers and pesticides are now five times more expensive than 10 years ago.

"Although the wholesale price of wheat rose in the last several years, the increase was too slow compared with the cost. That's why farmers earn much less than even a construction worker in the city, " he said.
A profile of a Li Laihao, a farmer in Shandong, fleshed out the situation:
Li's neighbors are becoming more reluctant to grow crops. Dongjinkou is home to 1,400 residents, but at least 1,000 of them work in cities most of the year. The adults who are left are in their 40s and 50s, generally above hiring age in the cities, or older. Few of them are able to handle the hard work of farming.

Five years ago, lots of residents visited flour mills to grind their wheat in the afternoon. During festivals, Li said, he had to wait in line. Now only one mill is operating.

In years past, Li said, neighbors helped each other during busy seasons. The only cost to the farmer was for meat and vegetables to feed their volunteer workers. Now farmers hire local people or rent machines to plow, water, harvest and clear the land. The cost is 66.7 percent higher than it was five years ago, when fewer locals rushed to the cities.

The cost of irrigation is a special concern. Local farmers complain that few irrigation facilities run well, and more than 75 percent of the land has to be irrigated with water from wells they dug. Even when there are no dry spells, like the severe drought that's affecting much of northeastern China, farmers worry about the rising price of fuel to pump the water. [2]
The government is nervously nibbling around the corners of the problem, fiddling with grain prices, providing small per-mu (1 mu = 666.67 square meters) subsidies, and pumping government money into irrigation.

The big, fundamental reform - allowing the price of agricultural commodities to float freely per market demand - isn't going to happen, as the China Daily article points out: "If crop prices increase quickly, poor urban residents will suffer."

It appears that the Chinese government has a strategy. It involves using urbanization as a safety valve for rural discontent - the goal is for over half of the Chinese population to be living in urban settings by 2015. And that implies suppressing rural incomes, both to keep the urbanization dynamic going and to keep a lid on food prices to avoid fueling urban discontent.

The talk of food security seems to be mostly that - talk. Talk designed to demonstrate the government's concern for its rural sector and its farmers, many of whom will probably evolve into rent-seeking landlords overseeing the work of younger agricultural wage laborers.

Action, on the other hand, is focused on keeping food prices low for potentially rambunctious urban residents.

China's priorities can be illustrated by its handling of a piece of agro-industrial policy run amok: the subsidized corn ethanol fuel additive business.

From a cost standpoint, corn-based ethanol is a bad business.

If ethanol has a future it is in the tropics, with sugar cane, probably in Brazil.

Cane-based ethanol utilizes directly-available sugar, creates ethanol through a simple yeast fermentation process, and burns the bagasse waste for power. Productivity in ethanol/ha: about 7,000 liters. Ratio of energy output to input: 10:1. Cost: somewhere around $0.85/gallon.

Corn-based ethanol, on the other hand, requires a complex, capital-intensive process employing expensive enzymes to convert starches to sugar, and relies on fossil fuels for process heat and power. Productivity in ethanol/ha: about 4,000 liters. Ratio of energy output to input: less than 1.5:1. Cost: somewhere around $1.20/gallon. [3]

The United States persists with this industry out of respect for the three gods of energy security (substitution for gasoline imports), clean energy (fewer greenhouse gases), and US agricultural interests - both US farmers and the agribusiness (and campaign contribution) stalwarts like Archer Daniels Midlands, whose six world-scale plants account for one-quarter of total US corn ethanol output. [4]

The US program is made possible by a sizable subsidy - a $0.45/gallon tax credit - and a sizable tariff - of $0.54/gallon, and an Environmental Protection Agency mandate to mix 10% ethanol into gasoline in locations like California that suffer from bad air quality.

The response to this generous giveaway has, as one might expect, been runaway production.

The United States, despite its manifest disadvantages, is the largest producer of ethanol in the world, producing over 10 billion gallons - 60% more than Brazil.

Fully 40% of the US corn harvest - 4.9 billion bushels - now goes to ethanol production. This enormous new demand for corn has played an important role in pushing global prices for corn - and with it other grains, such as wheat, that can substitute for corn in the feed and food industry - to record levels.

It would be an exaggeration to say that the revolutions in the Arab world were born in the corn fields of Iowa but, the stress of spiking food prices - in 2007, 2008, and 2010, which saw a 53% rise in the price of corn - certainly had a significant role in eroding the finances and legitimacy of the authoritarian Arab governments.

Egypt - which bears a much higher population load per hectare of arable land than China - is also the world's largest importer of wheat. The price of wheat went up 114% over the year leading up to the February 2011 revolution. [5]

Beyond the $5 billion or so in tax subsidies provided to the ethanol industries, American consumers also pay a hidden subsidy: because ethanol has a lower energy density than gasoline, cars with the ethanol blend get significantly lower MPG than those running on the pure juice.

Al Gore, who helped champion corn ethanol, now admits it was "a mistake". [6]

In addition, the US ethanol tariff is a continual irritant in US-Brazil relations, even as the United States tries to woo Brazil as an ally in its fight against Chinese trade policies.

Nevertheless, the Obama administration sees ethanol as a political winner in the heartland, and the EPA issued a rule mandating the increase in the blend from 10% to 15%.

The ethanol/agribusiness juggernaut is so powerful in American politics today that it looks like only one force can check it: the oil industry.

In a sign that venality, rather than sanity, was asserting itself in Washington once again, two darlings of the oil industry, Oklahoma congressmen John Sullivan (Representative-Oklahoma) and legendary global warming denialist James Inhofe (Senator-Oklahoma) co-sponsored a bill that would block any EPA funding for executing the mandate, on the pretext that higher concentrations of ethanol would defile the purity of the gasoline-friendly fuel injectors inside America's automobiles. [7] 

Continued 1 2  

Fear of death by eating (Mar 11, '11)

Chinese learn to live with rising food costs (Mar 1, '11)

1. Hidden energy crisis in the Middle East

2. Scandals strain US-Japan relations

3. The birth of Islamic modernity

4. Rebels outgunned, overstretched

5. Unstringing China's strategic pearls

6. BOOK REVIEW: Smoking out
Vietnam War truths

7. Do you feel lucky?

8. War games on Nightmare Range

9. Rage against the House of Saud

10. Apple mugged

(Mar 11-13, 2011)


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