Burning our food: The drought and the vice of ethanol

posted at 5:31 pm on July 28, 2012 by Jazz Shaw

It’s not going to come as a surprise to anyone who has stepped outside this summer, but the drought engulfing most of our major farmlands is hitting epic proportions. In fact, the USDA has again downgraded the nation’s corn crop, saying that only 26% of it is in “good” or “excellent” shape. This is bad news all across the board, and it’s also highlighting some of the dysfunction in how the government interacts with a variety of industries.

The news is bad for farmers, of course,(and we’ll get back to them in a moment) but the impact is rippling out to affect everyone.

California might not be dry as a bone, but with the drought throughout most of the rest of the nation, it might as well be.

The drought is pushing up the cost of meat and milk and other dairy products for the state’s consumers. That’s because the cost of feed for California cattle, poultry and hog farmers is soaring as Midwest farms face a shortage of corn and soybean — key feed ingredients.

The higher prices won’t hit the grocery shelves for a few months, but when they do, consumers will be paying 10% to 15% more for milk, beef and poultry, farmers and economists said.

Your prices are going to rise, but do they have to go up this much? Yes, they do… thanks to Uncle Sam.

A persistent drought compounds a problem already besetting farmers, they and agriculture economists said. About a third of the country’s corn is diverted to produce ethanol under federal renewable energy standards. Ethanol production already had driven up the price of corn in recent years.

“The ethanol policy is a bad idea because the impacts of a drought are much more severe than it used to be,” said Colin Carter, a UC Davis agriculture economist.

Livestock producers have lobbied for changes to the ethanol policy, but to no avail. The ethanol issue underscores the severity of the problems in the animal industry, said Bill Mattos, president of the California Poultry Federation.

This is the real world example of reaping what you sow if you’re burning your food to achieve a government mandated “green energy” program absent the invisible hand of the market. But there’s even more meddling going on under the covers. Remember the aforementioned farmers and how the drought is affecting them?

Shouldn’t rising prices for corn be good for farmers? Well… yes. IF you happen to be lucky enough to live in one of the few areas that got rain and you actually have a crop to sell. But for everyone else, it’s bad news. They have to rely on their insurance just to break even. You know how insurance works, right? You pay premiums – even if you grumble about it – but when disaster strikes, you’re pretty glad when that check arrives.

Unfortunately, that’s not quite how it works with farmers in America. Bruce Babcock of Iowa State University explains.

“It’s not really insurance, because, as we know, when we buy insurance, we have to pay the full premium,” Babcock says, “and that premium covers not only the losses, or the claims that are made, but also the administration and profit for the company.”

When a farmer buys crop insurance, the government picks up most of the premium, and it also pays operating expenses for the companies. Those two subsidies cost close to $8 billion a year. But taxpayers also insure crop insurance companies against catastrophic loss.

So, as claims from this year’s drought mount, the USDA will shoulder a larger and larger share of the payout.

Did you catch that part? The farmers don’t have to pay for all of the premiums. And under normal conditions, a big disaster represents a huge hit to the insurance companies. But in this case, they’re saying they’re going to be just fine. Why? Because they don’t have to pony up for all of the farmers’ losses. So who is going to pay the tab for all of this at the end of the day?

I’ll give you three guesses and the first two don’t count.

References in this article:
Infographic: Smarter Fuel Future
World Agricultural Supply and Demand Estimates: USDA
Food prices to rise in California amid drought elsewhere: The LA Times
Big US crop insurers say losses manageable despite drought: Reuters
Despite Crop Insurance, Drought Still Stings Farmers: NPR
As drought tightens grip on U.S., forecast is ‘dry, dry, dry’: The LA Times


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