The problem with ethanol is that the inflation of food staples is outpacing the inflation of gasoline prices.

Food very likely is the product with the most inelastic demand in the world. It doesn't matter what the price is, people want to eat, and they will if at all possible.

In 2004, ethanol was a boom industry because food was cheap. We were producing excess food, and we had plenty of fallow land. Hell, we were paying farmers not to grow crops to keep the food supply down and the price high enough so that the farmers could survive.

Once the ethanol demand started taking some of the excess food and un-used land, we got to a point where any more food crop taken up by ethanol would reduce our food consumption... and people started paying more for food.

So, while oil has gone up ~30%/year, food staples (like corn) have inflated ~70%/year. That means that the ethanol industry became unprofitable very quickly.

In the end, it boils down to the simple fact that people want food more than they want fuel. It's not really all that complicated.

Tundra: Food very likely is the product with the most inelastic demand in the world. It doesn't matter what the price is, people want to eat, and they will if at all possible.

LeRoy: There is a category of goods that very likely has perfectly inelastic demand over a rather large price range. The classic example is: INSULIN. Or any other life-saving medicine that is required in a set dosage. The diabetic is going to pay almost any price for the amount of insulin they need on a daily basis. If the price of insulin started to soar, they would first cut back on everything else, then they would try to reduce their dosage, and then, if the price kept rising, they would croak.

Food, as a general category, certainly would have very inelastic demand, but not PERFECTLY inelastic. After all, we have quite a few Americans who could, ah, afford to cut back on their food intake a little bit. Some even say we have an obesity epidemic. [And, I know, some of that is caused by inner city residents finding that artery-clogging fast food is actually cheaper than buying fresh produce and eating a healthier diet...]

Leroy, Insulin shares the characteristics of any product which is essential or deemed essential--which would also apply to illegal drugs. However, there are asually substitutes that are available. A Heroin junkie can get by with Hycodan cough syrup when his supply gets cut off. Even more so, most people have food choices...as is well know by the Hedonics manipulators at the BLS who come up with their entertaining CPI numbers each month. Steak too expensive? Try hamburger. If beef requires 9 times as much cereal grain to produce the equivalent food calories, a switch to vegetarianism is a definite option. Dried beans and rice, the staples of the Macrobiotic communes of the 1970s, are going to make a big comeback and trounce the high animal protein diets of recent times. Only instead of practicing this spartan diet to acquire virtue and enlightenment, we will do it out of economic necessity. We may even end up choosing the high carb diet to put on weight as our clothes get too baggy!

Fair enough, but what is the substitute for insulin? This is a product which is not just 'deemed' essential...it IS essential, at least for diabetics. As the econ textbooks say, ALMOST all goods have substitutes of one kind or another...but insulin is the classic example of a good with no substitutes...which is why the demand curve for insulin is perfectly vertical, at least at real-world prices. [It would be very cruel for the government to tax insulin; the consumer would end up paying ALL of the tax. One could easily tax diabetics out of existence. Which perhaps the Social Darwinists and eugenics advocates would approve of...]

Addictive drugs are known to have very inelastic demand curves, but they are not perfectly inelastic. As you note, there ARE substitutes for the heroin addict. Tobacco addicts can resort to the nicotine chewing gum or lozenges. We know that the demand curve for cigarettes for young smokers is a bit more elastic than that for long-time smokers; they are not as addicted yet---which is the usual justification for high taxes on cigarettes, as they might discourage young people from picking up the noxious habit.

I live mostly on rice and beans; so I am already there. A steak is a rare luxury for me; sometimes on payday...

In the FIRST world... but that's only ~10% of the world consumers. In the third world, food is much closer to insulin. And, as we both very well know, we are a global economy. :)

I think we agree wholeheatedly on the "mystery" of why ethanol can't sustain profitability beyond a certain volume of production... Once the ethanol market starts really competing with food, people realize they want to eat more than they want to go on their sunday drive.

:)

BTW, for type I diabetes, you are correct and the demand is perfectly inelastic. However, for type II diabetes (which is the majority of diabetes cases), ~80% of the type II diabetes patients can eliminate the need for insulin by switching to a very low glycemic load diet. :)

Producing meat, especially beef, is a very inefficient process. Much of our total grain production is consumed by these animals. Thus, switching to a more vegetarian diet in the US would free a disproportionately large fraction of the grain supply for human consumption.

Tundra:

In the FIRST world... but that's only ~10% of the world consumers. In the third world, food is much closer to insulin.

LeRoy: When food prices rise in the Third World, people DO have alternatives to paying the higher prices. They can, for one thing, RIOT. [We are seeing quite a bit of that, these days.] Or, they can do what quite a few people in Haiti are doing these days: they can resort to eating 'mud cookies'. They take mud, mix it with a bit of begetable shortening, bake it in their ovens, and then they eat it. Not very appetizing, of course, but it does give them some nutrients. Even less appetizing is what people have done during past famines. During the terrible famines which took place in Europe during the period 1317-1321, when the climate started to tip into what we call the Little Ice Age, people were trying to stay alive by subsisting on animal dung...or digging up corpses (and, yes, eating them). So, even in an impoverished 3rd World country, the demand for food may not be PERFECTLY inelastic. [Darned close though: we agree on that!]

Tundra:

BTW, for type I diabetes, you are correct and the demand is perfectly inelastic. However, for type II diabetes (which is the majority of diabetes cases), ~80% of the type II diabetes patients can eliminate the need for insulin by switching to a very low glycemic load diet. :)

LeRoy: You are, of course, correct about this. I should have been a bit more precise, and said Type I diabetes.

Is there any evidence whatsoever that production of ethanol has in fact sucked up all reserve supply of corn? Is ethanol even in production en masse in this country?

Do you even have ethanol pumps where you live? I sure don't, there are 2 in my entire state and both have been there for a long time, long before the media got a hold of this story.

While E85 pumps are still scarce, almost all the gasoline in America has now included 10% ethanol as a standard. I'll get the stats when I have time, or perhaps Leroy or Phil could look them up... but the amount of corn produced in America has increased by ~70% last year alone, and that's corn - which is shit for producing ethanol... every nation on the planet has increased agricultural biofuels production - including nations like China and India and Indonesia and much of the 4th world that are literally starving. Food is an international fugible commodity. If Indonesia starts converting all of its cropland to palm production for biodiesel, then they'll import more food... and the global supply/demand situtation worsens... and food prices inflate.

This situation is drastically worsened because many nations - including and especially ours - have subsidies helping to support ethanol over food, making food inflate even more to remain competitive. :)

tundra:

Welcome back and it is nice to see you.

The last time I looked, almost 50% was imported. Cheapen the dollar and the price of the imported stuff goes up. I would think very carefully about those subsidies for farmers . . . maybe redefine how they are parceled out. I would suspect that there is plenty of corn for ethanol in the US once land is planted. The issue is a lack of corn right now driving prices

has more than doubled in the last two years... and is likely to double again. But this is not helping. Every new acre of previously untilled land has a great deal of CO2 sequestered into the top foot of soil. When the land is tilled, that CO2 is released. The amount of CO2 that gets released varies, but it would take a minimum of 30 years (for extremely fertile conditions for a sugar cane crop) of biofuels production from that land to offset enough fossil fuels to balance that CO2 release... So at least from an environmental standpoint, significantly increasing the amount of land used for corn production isn't helping.

I agree concerning subsidies. Most of the corn ethanol would shift to sugar beet ethanol without subsidies, which would just give us more fuel. It's absurd to argue - facing today's prices - that the farmers NEED government aid to stay afloat.

Nice to be back. I was thrilled that Gross had an article on something interesting. :)

I think you mean that carbon, rather than carbon dioxide, is sequestered in the topsoil, which contains a high percentage of organic material. Tilling it would expose it to oxidation and it would, to some degree, oxidize. However, I think that major carbon dioxide release would occur when new plants extract nutrients from that material, breaking down the various molecules. If most of the plant is plowed back into the ground, then the organic content is restored. This happens in corn farming, with the corn kernals stripped off and everything else - stalks, leaves, and cobs returned to the soil. The nutrients carried off are commonly replaced by fertilizer, which I don't believe is rich in carbon unless organic fertilizers such as processed manure or sewage are used. In any case, I believe that as long as the concentrations of the various non-carbon materials is maintained, the carbon content of the top-soil would remain constant. I would suppose that, if something like switchgrass or sugarbeets was grown and used as feedstock, plowing the remaining mash into the field would probably have the same effect as plowing the corn plants into the ground does. In any case, there will be a requirement for continuous fertilization to return the nutrients to the ground but, with that constraint, the amount of sequestered carbon could probably be kept constant.

What is a different issue is the desequestering of carbon which is inherent in replacing a massive crop (like a rain forest) with a less massive one - I don't think the constitution of different plants is enough different that one can't estimate the carbon content directly from the dry weight.

I hope that was reasonably useful and reasonably correct. It's been a half a century since I took any chemistry classes, so I'm a little shaky on some of this.

Phil:

Which is why they recommend tilling ground charcoal into the soil for veggies. It helps with growth.

tundra:

I guess my preference would be not to see us import more food to the US and keep it as one of the US's major products to feed our own people. I can cut back on oil/gasoline, if held hostage, and I could afford to lose 10 pounds; but eventually, we all need to eat. Giving away the complete control of our food I do not consider an option when we have some of the richest land in the world for agriculture. Balance it according to prices perhaps.

I agree on the ethanol subsidies. This was dumb from the gitgo and political by design although our gov is always reactive and lacks proactivity in leading the way. Maybe we will stumb on the right path as a result?

The right path is to change the market in such a way that it benefits all options that have a net reduction in fossil carbon emissions, and penalize options that have a net increase in fossil carbon emissions.

If, instead of subsidies, we had a fossil carbon tax (with a coresponding fossil carbon tarrif), and re-distributed the funds collected equally to all adult American citizens... It would solve the problem.

Americans would still have the money that they need to make the investments they need to make, but there would be an item-by-item and choice-by-choice incentive to choose options which lower carbon emissions. We would see ethanol from sugar beets become MUCH more profitable than ethanol from corn, solar power competing with coal, high-efficiency windows paying their investment off in 2-3 years... etc.

It would be an economic stimulous/environmental revolution act... and it could change the world in less than a decade (especially if the tax was constantly escalating).

Instead, we choose to try to micro-manage the details and give specific subsidies to one idea at a time... until that idea fails and we try something else... which fails.