Letters from subscribers: On subsidies, grain and SUVs, sugar cane and the third world

From time to time, Biofuels Digest publishes some of the correspondence with readers that occurs offline. In this instance, a reader wrote in regarding a wide variety of subjects, and the note offers an opportunity to discuss several important and interrelated items. The full text of the letter is below.

In summary, the writer discussed what he thought should and should not be subsidized in the US and Europe, wrote a critique of agricultural subsidies, asked about Brazilian tariffs, and wondered why more biomass and biofuel is not imported to the US from countries such as Brazil and Ghana.

—

Dear Friend,

I appreciate your detailed and thoughtful note. I have given some thought to the questions you posed, all of which are important.

Subsidies

Subsidies have been around for a long time. I think “subsidy” is a bad term, myself. I prefer public investment, for that is what it is. Really, it reflects a division into what should properly be paid out of the broad base of a public purse, versus the narrower base of the private investor market.

For example, virtually all of the land now held in private hands in the US (outside of the original 13 colonies) was purchased out of the public purse, improved, and eventually privatized through land grants and sales. These were good investments, yet well beyond the capability of private markets because of the scale of investment, scale of vision, and timescale of payback.

That’s one kind of subsidy.

Another is the financing of security-based needs through the public purse. For example, the US interstate highway system, or the US military itself. Those are good investments too, and well beyond the resources and short time scales of private investment. Food security is in here somewhere too, which is the subsidization of a farming industry in an industrialized nation, to ensure a domestic food supply in spite of high domestic wages and land values that would plainly make it cheaper to import food from abroad.

The third kind of subsidy is the handling of externalities, such as carbon emissions. The long-term solutions to externalities have a hard time in the raw marketplace — coal-fired electricity is far cheaper than electricity from renewables, for example.

As you say, subsidies should not be used lightly, but “reverently, discreetly, advisedly, soberly and in the fear of God”, to quote the Book of Common Prayer. To use them for domestic needs is one thing; as a bludgeon for ruthless market-share grabbing in world trade is quite another.

But it is a tactic which otherwise Christian, scientific and civilized states, to paraphrase Churchill, have been unable to deny themselves. They always feel that the existence of something more important is at stake – the future of the nation, the future of a parliamentary majority, or the future of a poll of voters in an upcoming election.

So I suspect that subsidies for energy and food resources will be with us for the long haul, and like an unwelcome but unavoidable relative come to live with us, we might as well get used to it, and shift for ourselves as best we might. Limiting the scope of subsidies seems to me the work of statesmen; the elimination of them I suspect would test the talents and patience of St. Paul.

SUVs

With respect to the comparables of grain for food, and grain for fuel, I would caution you against the catchy yet inaccurate image of the SUV which uses as much grain for a tank of fuel as could feed a man for a year.

First of all, the grain used for ethanol is grain for livestock, not human consumption. The conversion rate of grain to beef is 10 kilos of grain produce 1 kilo of beef, so we should start with a comparison of 24 kilos of beef vs. a tank of E100 in a SUV.

The SUV won’t run on E100, of course, and would be illegally operated if it could, because SUVs in the US use a maximum of E85. So there is really about 20 kilos of beef there.

Further, we have to get the beef slaughtered, packaged, and moved to market, because it doesn’t do much good rotting in a field in Illinois.

Then again, it has to be cooked – using coal- or gas-fired flames – unless one is feeling like a risky dish of raw beef.

Also, does everyone drive an SUV? I drive a Jetta myself – 12.5 gallon tank, not a twenty-fiver.

When I finish with the math, I get a choice between the tank of environmentally friendly E85, or roughly 3.3 kilos of beef. That’s meat for three days on an average US diet, for a family of four.

Why not do something for the brotherhood of man, skip the steaks until Thursday, and help take carbon out of the sky for the benefit of those yet to be born?

Sugar cane

Sugar cane indeed has a prettier profile for ethanol than corn, or most foodstocks. I wish more of it could be grown in the US. I always regretted the decline of the sugarcane industry in Hawaii, and it is a wistful thing indeed to drive on the north side of the Big Island and see cane field gone back to nature when we are in the state we are in with respect to carbon.

It’s for that reason that I have always been a steadfast supporter of the removal of the ethanol tariff on Brazilian sugarcane based ethanol. I have studied Senator Grassley’s defense of the tariff and understand the reasons why it was developed, to balance the ethanol tax credit so that Brazilian ethanol was not subsidized by the US taxpayer.

But Baghdad is subsidized by the US taxpayer. A lot of things that are important and foreign are subsidized by the US taxpayer.

I don’t see any harm in importing large quantities of Brazilian ethanol and driving down the price of world oil. We’ll make back the difference in oil savings, I would suggest.

With respect to public investment and price supports in the US sugar cane industry, I wouldn’t rush to judge US Sugar and others before I looked into the conditions in the Brazilian sugar cane industry. Those subsidies and supports may funnel some extra profits, but in the main they funnel higher wages to cane field workers.

You don’t have to agree with Bloomberg Television’s hatchet job on Brazilian sugar to know that Brazilian industry and government leaders conceded that more progress is required in improving the life of Brazilian cane workers. There are aspects of achieving cost efficiencies in cane production that should give us all a pause to think. Cheap sugar means low wages, and we all bear the responsibility for the lifestyles created by buying from the lowest-cost producer.

Meanwhile, having spent some time kicking around US sugarcane towns like Belle Glade, FL, I can assure you that there aren’t any sugar millionaires among the workers. It’s heart-breaking to see poverty any place at any time, but to see hard, stark, grinding poverty, not 40 miles from the mansions of Palm Beach, is tough on the soul.

My mother was from poor but proud farm family. She slept in a chest of drawers when she was a baby because there was no money for a crib, and up to 8 people sleeping in a small room. No one should have to live like that, not here or anywhere, just to give us a cheaper gallon of fuel. So I don’t support the reduction of price supports for US sugar, although any time someone has a better way to allocate price supports more justly or efficiently, I am all for it.

The cost advantages on producing biomass in Brazil, Ghana, etc.

You are right my friend, it is cheaper to produce biomass in countries like Ghana than the US or Europe. We have cold climates in the north, and our foods grow less luxuriously. There is no doubt of it. The sunny, equatorial lands may well be the salvation of future generations of Asians and Africans, not to mention South Americans. Bring on the better world!

But first, let’s make sure we take some time to think about infrastructure. “If you build it, they will come” wasn’t even a good idea for US ethanol, much less the most promising lands for biomass in the Third World.

Having worked on terminal projects for Africa, biomass plantations in Brazil, and even plantation projects in Ghana and Uganda, I can tell you that we have a long, long ways to go before we have the right infrastructure in the Third World. We could have a long chat about the potential in Angola – a countryside savaged by a civil war where biomass might just be the ticket back to prosperity. There are many other candidate countries. But it is not enough to grow biomass, or even build a plant. There are roads in disrepair all over the biomass map, even where there are roads.

In Haiti, there are sections of roads where jatropha farmers can’t make more than 2-3 miles per hour. Not to mention the importance of developing and deploying ethanol-burning trucks and machinery, or having a supply of biodiesel on hand – for what is the point in using biomass to save emissions, if we bring it to market using fossil fuels?

Storage and blending facilities for biofuels in the Third World are far less in quality in capacity than they need to be. Alas, we have far to go.

As another friend and correspondent said to me today, when we were having a quick chat about his operational challenges in South Asia, “I’m up to my behind in alligators and trying to remember how I got into this swamp in the first place”.

“Probably it was the glint of diamonds on the other side,” I replied. Which leads me to my next subject.

Ownership of Western projects in developing nations

Is it really the solution to bring boatloads of Western capital to the third world to buy up plantation land to make biomass for the industrial world? We might want to think that through; it’s been tried with other primary industry including minerals, coffee, bananas, and so on. The West has much to answer for in the way it handled its moment of ascendancy, also called the colonial period. Need I mention the long list of misadventures along those lines?

But it’s not so easy to amass project capital where local landholders and workers, or the nation, retains a share of the gain. I’ve run the numbers on many an occasion. It leads to a hotshot lecture from a hotshot kid at a hotshot fund about what a “hurdle rate” is and why said project doesn’t meet it.

I would like to think I have retained more enthusiasm for the Third World than most. But I believe we need to proceed cautiously. Rather than simply rushing to harvest cut-rate biomass in sunnier climes without a long-term plan, let’s reflect on the hard lessons of the colonial era, and avoid mistakes that will travel with us far down the road.

Obama’s flip-flop

You mentioned Obama, but didn’t say much. I’ll not say much on this either, except to voice the hope that all those who stood for biofuels when the going was good ought to stand by it in the hour of need.

Friend, I certainly enjoyed your letter, and look forward to our next correspondence.

Yours,
Jim Lane
Editor
Biofuels Digest

—

Dear Jim,

I read your article on China and food, would have loved to hear your radio interview today (is there a Webcast version for it?). I think your most interesting accomplishment in the article was to provide a dimension of China as a food consumer, side by side with other arguments about bio-fuels. As a contribution to your reasoning, I would like to provide a few comments:

1 – It is reasonable that environmental actions need to be somehow subsidized due to a market failure: economic agents (consumers) do not face the full consequences of their actions, because of “externalities”. In other words, you bear the direct cost of gasoline on your car, but just a fraction of the damage for the environment that your driving causes. One of possible solutions is to make energy consumers pay for the necessary repair, therefore subsidizing environmental actions.

2 – Subsidies are therefore reasonable and necessary to counter the perverse effects of negative externalities; they may be useful on a temporary basis to create positives externalities in the creation of new industries/markets. They can be extremely harmful if they promote a wrong allocation of resources, on a continuous basis. This is like taking medicines; you should take them if and only if you are ill, otherwise it may cause harm instead of cure.

3 – The U.S. has an enormous number of subsidies for agriculture, oil, and now for biofuels. It is very important to discriminate what is useful (and for how long) and what is harmful. These subsidies have caused severe mis-allocation of resources, not only in the U.S., but mainly in Europe. One number that I read (you can check it better) is that one SUV tank demands corn enough to feed one person for one year, in terms of calories. The person that will not eat may reside in Africa, Mexico or even in the U.S.

4 – Ethanol from sugar cane is 6 or 7 times more productive than ethanol from corn, in terms of energy input. The U.S. has areas with sugar cane, that are exclusively devoted to the production of sugar. Since sugar is highly subsidized in the U.S., sugar cane producers are happy not producing ethanol. One subsidy creates the need of the other, and so on. Why is Brazilian ethanol taxed at .54 cents per gallon, and oil is duty free?

5 – Countries like Brazil, Ghana, have a comparative advantage to produce biomass. You need land, sun and water to do that efficiently. Many years of subsidies to U.S. and European production have created a disincentive to produce biomass where it can be done more efficiently. This is particularly perverse in food production, where many countries have been running substandard agricultures due to the difficulties to export their products. This introduced severe rigidities in the supply. Since demand has been growing, particularly with the explosion of consumption in China and other places, we have got to your scenario of very tight food markets. This point is very well presented in your article.

6 – U.S has do turn this around, and lead Europe to do the same. Again, main negative externalities are the environment and illegal migration, in both places, besides the local misallocation of resources. Ironically, it may take a Democratic government to address those issues, with a freer trade for agricultural goods, since the previous Republican government has preached free trade but kept it for industrial and services, not for agricultural goods. Free trade and subsidies do not match well.

In other words, I normally agree with your thoughtful analysis, but do not agree with the use of the word “flop”, which has a negative connotation of “change” meaning “failure”. In this case, for most people it is not. I would appreciate to learn more about your interview today.

Free Subscription to the Daily Biofuels Digest e-newsletter

Related Stories

Former Enron South America head calls for sugar cane production on up to 37 million hectares in Brazil

The former head of Enron South America predicts that cultivating 37 million hectares of sugar cane in Brazil would supply an ethanol blend world wide by 2030. Gordian Energy Partners, the executive's ...

Cosan says sugar cane production to rise, ethanol/sugar ratio unchanged

In Brazil, Cosan said that it will increase sugar cane production by 8 percent to 58 million tonnes of cane in 2010/11, but said that the sugar giant would maintain its 58/42 spilt between sugar produ...

Imperial Sugar proposes 60 Mgy sugar cane project in Louisiana

In Louisiana, Imperial Sugar said that it is investigating a 60-100 Mgy sugarcane ethanol plant that would be located next to its Gramercy sugar refinery. The company is currently investigating financ...

Sugar cane vs corn

The News Virginian reports on the merits of sugar-based ethanol vs. corn. The article quotes 2006 report from the USDA and Louisiana State University that found ethanol produced from sugar cane cost 2...

Jim Lane’s “Citizen Cane: Essays for New Days in Bioenergy” published; free PDF for Digest subscribers

Digest readers: Today,  the new book "Citizen Cane: Essays for New Days in Bioenergy" by Biofuels Digest editor Jim Lane is available in PDF format for subscribers at the usual Biofuels Digest "low, ...

Louisiana researchers extending growing range of energy cane northwards

In Louisiana, researchers at the LSU AgCenter's Audubon Sugar Institute have received $1.38 million in funds from BP and the US Department of Energy to study means of lowering the extraction of sugars...