Ethanol and recession, and, oh, pigs

Robert Samuelson writes in today's Washington Post that we may need to change our thinking aobut recessions.

It's increasingly clear that much of our standard economic vocabulary needs revising, supplementing or at least explaining. The customary words we use don't fully convey what's happening in the real world. Let me illustrate with two basic economic terms: inflation and recession. There are also larger lessons.

And this has what to do with Indiana's favorite alternate fuel, ethanol? A whole lot:

We all know about oil. Prices are about $60 a barrel. They seem unlikely to return to $28, the 2000 level. The real surprise involves food prices. In the past three months, they've risen at a 7 percent annual rate. We may be seeing the first adverse effects of the ethanol boom. Corn is a main feed grain for poultry, cattle and hogs. Corn is also the main raw material for ethanol, an alternate fuel for gasoline. Competition for grain has pushed up corn prices to about $3.50 or more a bushel, almost double a typical level. High feed prices have discouraged meat producers from expanding. The resulting tight meat supplies raise retail prices.

"Poultry is the best example," says economist Tom Jackson of Global Insight. "In the past 40 years, we almost never have year-to-year decreases in production. In the past few months, we've seen production go down." In March, the decline was 4 percent from a year earlier.

So the government's subsidies for corn-based ethanol are worsening inflation, perhaps permanently. Coupled with precarious global oil supplies -- posing a constant threat of higher energy prices -- that may make core inflation a less useful indicator. Ups and downs may no longer cancel each other. Inevitably, these developments also pose policy questions. Considering ethanol's tiny contribution to our motor fuel supply (about 4 percent), is the program worthwhile? Or is it a giveaway to corn farmers?

All that resonates with a The New York Times article (April 22, 2007)on the new farm bill with the headline,You Are What You Grow, that I read yesterday. The ethanol streak may exceed what Samuelson wrote about today:

To speak of the farm bill’s influence on the American food system does not begin to describe its full impact — on the environment, on global poverty, even on immigration. By making it possible for American farmers to sell their crops abroad for considerably less than it costs to grow them, the farm bill helps determine the price of corn in Mexico and the price of cotton in Nigeria and therefore whether farmers in those places will survive or be forced off the land, to migrate to the cities — or to the United States. The flow of immigrants north from Mexico since Nafta is inextricably linked to the flow of American corn in the opposite direction, a flood of subsidized grain that the Mexican government estimates has thrown two million Mexican farmers and other agricultural workers off the land since the mid-90s. (More recently, the ethanol boom has led to a spike in corn prices that has left that country reeling from soaring tortilla prices; linking its corn economy to ours has been an unalloyed disaster for Mexico’s eaters as well as its farmers.) You can’t fully comprehend the pressures driving immigration without comprehending what U.S. agricultural policy is doing to rural agriculture in Mexico.

From the New York Times also comes hints of a solution to some of the food problems - eating locally.

Ms. Abel and Mr. Madden are dabblers in a small but increasingly popular effort to return to a time before the average food item traveled 1,500 miles from farm to table. In that sense, the only thing new about the phenomenon is its name, locavore, which was coined two years ago in California. But the appearance of the word seems to have given shape to a growing subculture. Weeklong locavore challenges have been popping up all over the country, even in places like Minnesota and Vermont, where it would seem to be pretty hard to eat local foods in the dead of winter.

Many drawn to the movement say they have been eating that way for years and had never thought about the implications beyond the flavor. “Initially it was the taste thing for me,” said Robin McDermott, who lives in Waitsfield, Vt., where locavores call themselves localvores. “But now when I think about what it takes to get lettuce across the country so I can eat it in the middle of winter, between the fuel costs and the contribution all the transportation is making to global warming and climate change, I just can’t do it. It’s not sustainable and I don’t want to contribute to it.”

If this idea really catches on, then what does it mean for the farmer 200 miles away? For every action, there is a reaction.

Finally, the pigs! I found this on the BBC a few days ago: Pig fat to be turned into diesel.

American oil company ConocoPhillips and Tyson Foods, the world's biggest meat producer, have announced that they will produce diesel from pork fat.

Now how do that with increased costs of corn to feed the pig?

Why do I get the feeling that Indiana dodged so many of Governor Daniels' harebrained, get rich schemes that we have fallen for the one that might actually cause us too much harm to avoid? The state government supports increasing ethanol production so that our farmers can have a decent income. If ethanol production sucks in the corn production as it is and as it predicted to do even more of, then what happens to all of our income in the face of increased food costs. Has Daniels again mistaken a bold idea for a good idea? Has he put all the eggs of Indiana's agiculture into one basket?