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2 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]
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