Tag Archives: ethanol

03.20.2013 | Demand and Supply: The Ethanol Mandate

Several years ago, when former Treasury Secretary Lawrence Summers walked past me, I stopped him with a question. “What is the most important economic idea to teach my students,” I asked. Without missing a beat, he said, “the power of the market,” and continued walking.

Now, with an ethanol mandate from Congress, I keep thinking, “the power of the market.”

Here is the story. We have to start with the power of Congress before we get to the market.

In 2007, Congress passed the Energy Independence and Security Act. Hoping to mandate more use of biofuels, they established quotas and subsidies. One goal was to increase ethanol use from 2008-2022. On the production end, they mandated the amount of ethanol to be increasingly produced and then blended into gasoline. With a 46 cent per gallon subsidy, they made ethanol production cheaper until 2011.

Make sense? It is not quite working out how they planned. The market has been colliding with the “commands” from Congress.

One problem has been that the price of corn responds to market supply and demand. A lot of US ethanol is corn based. More expensive corn can increase the price of ethanol production.

Congress has also not been able to control the price of credits called RINs. Through RINs (Renewable Identification Numbers), the EPA makes sure that the required amount of ethanol is blended into gasoline. Simply (if possible) explained, RINs accompany every batch of ethanol. Gasoline blenders can sell RINs if they blended more than required to blenders with less. Ultimately, they hand them in to the government to prove compliance. Demand and supply affect the RIN price. The RIN price is currently soaring.

Then also, we have the price of gas. A result of demand and supply, when price is high, people tend to buy less. But, if they buy less, then they will not be consuming the annual amount of ethanol that Congress mandated (13.8 billion gallons of ethanol during 2013; 14.4 billion gallons during 2014). But ethanol producers and blenders have to create a certain amount, no matter how much consumers buy.

Sorry this sounds so convoluted. But it takes us back to Secretary of the Treasury Summers. The power of the market is reducing the power of Congress.

Sources and Resources: If you really want to learn about how Congress mandates ethanol production, this 2009 report is only a page or so and easy to understand. It ideally complements recent articles, here and here, on market distortions that resulted from the Congressional ethanol mandates interacting with market forces of demand and supply.

Please note that this entry has been minimally edited since it was posted.

Posted by: adminEcon
Tags: EPA, ethanol, gasoline prices, supply and demand, the market
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09.28.2012 | Pork Problems

Announcing the cancellation of this year’s bacon eating contest, Major League Eating (“the world body that governs all stomach-centric sports’) said, ”We cannot, in good conscience, allow [top ranked eater] Joey Chestnut to eat bacon during a global pork shortage,…We estimate that Joey alone could eat 20 pounds of bacon in 10 minutes of competition.”

Where is the pork shortage?

First stop, the US:

Skyrocketing corn prices make feeding pigs so expensive that farmers are killing their livestock. Actually, we have a pork glut now–up 31% between last August and this August according to the USDA. But less livestock will probably create a shortage during 2013.

Next, the European Union:

Britain’s National Pig Association (NPA) reports steep declines in Poland’s, Sweden’s, and Ireland’s pig population. Compounding the problem, in the UK, the NPA says sow herd size will probably drop by 20%.

And finally, China:

With global pork prices ascending, will China need even more inventory for its Strategic Pork Reserve (SPR)? Created during 2007 after porcine blue ear disease diminished the Chinese pig population, the SPR continues to stock hundreds of millions of pounds of frozen pork that are ready for release when prices spike. (But, according to the NY Times, frozen pork only lasts 4 months so maintaining the supply is more complicated than just keeping frozen meat.)

This returns us to the bacon eating contest cancellations. With pork so pricey, pancake contests are getting more publicity. Here, an economist would point out the unintended consequences. Who would have thought that a congressional ethanol mandate could have pushed corn prices upward, the pig population downward, and led to more pancakes???

Sources and Resources: My information on pig populations came from a Foreign Policy blog, a Washington Post blog, this Huffington Post article, and on China’s SPR, here. To describe Major League Eating, I used their publicity.

Posted by: adminEcon
Tags: animal feed, bacon eating contests, bacon shortages, China, corn, demand, ethanol, Major League Eating, National Pig Association, pancakes, pig populations, Poland, pork prices, Strategic Pork Reserve, supply, Sweden, UK, US
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09.11.2012 | The US Drought and Pizza

Discussing the impact of this summer’s drought on pizza, Stephen Colbert said, “It is one thing for global warming to make the sea levels rise but nobody told me it could make my cheese levels recede.”

Colbert was reacting to an economist at the US Department of Agriculture’s Research Service saying, “…you’ll see less cheese on pizzas and in salad bars.” The reason? In 90 degree temperatures cows produce less milk, dairy farmers need costly sprinklers and fans, and the drought has also driven up the price of animal feed. As a result, milk is more expensive and more expensive milk means more expensive cheese.

Just imagine your cheese supply curve. When the cost of production increases, the upward sloping supply curve shifts to the left and crosses the downward sloping demand curve at a higher equilibrium price and a lower quantity.

Colbert also suggested that farmers switch to drought resistant crops like sun-dried tomatoes and raisins.

Because of the drought that is affecting close to 63% of the continental US (please see map below), in addition to dairy industry costs, 52% of the corn crop was in poor or very poor condition, more cattle was slaughtered because of skyrocketing feed costs, the price of ethanol has risen, and the northbound barge trip between New Orleans and Memphis takes 3-5 extra days. (With lower water levels, barges need to shed weight and also take turns moving through shallow areas.)

If the drought continues, the Department of Agriculture predicts a 3-4% hike in food prices for 2013. Since last year, food prices have gone up 2.5% to 3.5%. And finally, very interestingly, economist Ed Yardeni explains in his blog why QE3, the drought and the GDP are related. As with food prices, it all relates to inflation.

Sources and Resources:

My stats, the stories and the map below are from either this WSJ article, weather.com, or this USA Today report. A video excerpt from the Colbert Report was the source of all that Stephen Colbert said. Looking at my sources and their links, you will see the multiple ripple of impacts, ranging from pizza to crop insurance to a miniature golf business, that this drought has created.

Posted by: adminEcon
Tags: animal feed, barges, corn, dust bowl, ethanol, farmers, inflation, Memphis, New Orleans, rising food prices, soybeans, Stephen Colbert, US Department of Agriculture, US drought
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