The Clean Water Act

I’ve been thinking a little about the Clean Water Act lately. Jonathan Coppess and I have written a few things about it on the ACE Policy Matters blog. We introduced the topic back in July. And a last week we looked at the weather as the great unknown that hampers effective regulation.

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I’m on the web

Check out my new site on the world-wide web:

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Will Ethylene Displace Corn-based Ethanol?

When we think about ethanol, most of us in the U.S. think about corn. If we were in Brazil we would think about sugar cane. Essentially we think about ethanol produced from a fermentation process. But ethanol can also be made from hydrocarbons found in fossil fuels. In particular ethanol can be made from ethane. Ethane is the second-most common compound in natural gas–after methane. Ethane can be converted to ethylene by steam cracking. And ethylene can be catalyzed to become ethanol.

This is (potentially) relevant because a few weeks ago the U.S. Energy Information Administration reported that “Proved reserves of U.S. oil and natural gas in 2010 rose by the highest amounts ever recorded since the U.S. Energy Information Administration (EIA) began publishing proved reserves estimates in 1977.” The following graphic illustrates the dramatic change in U.S. natural gas reserves.

U.S. natural gas reserves expanded dramatically in 2009 and 2010.

Consider the following scenario: 1) A drought in the Midwest causes corn prices to rise to unprecedented levels. 2) Technological advances (horizontal drilling and hydraulic fracturing) lead to a surging supply of natural gas. Event 1) reduces the profitability of corn-based ethanol production while event 2) increases the profitability of fossil fuel-based ethanol. Considering the wide-ranging cries to suspend the RFS ethanol mandate, one could imagine Big Oil supporting a looser biofuel mandate in order to take advantage of the changing economic picture.

I think a dramatic policy change is unlikely, but the surging natural gas supply adds an interesting wrinkle in the whole ‘food vs. fuel’ debate.

Posted in economics, food policy

Thinking about Ethanol Policy

Lately, a couple of my friends have posted their reactions to the Carter & Miller op ed in the NY Times. (You can see my take on it here.) I think Marc agrees too readily, and Michael brings up a good point, but misses the big picture. The most salient, thoughtful analysis of the current ethanol vis-a-vis feed debate was done by my colleagues at the University of Illinois. Scott Irwin and Darrel Good really understand the ethanol market. I’ve had countless conversations about it with Scott. On Scott’s recommendation, I even read Petroleum Refining to understand the structure of the ethanol and gasoline markets. (Fascinating book by the way, I highly recommend it.) Scott and Darrel point out that ethanol production is driven by demand from the oil companies (and blenders) not by the Renewable Fuels Standard. So easing the RFS won’t have any effect. Check out Scott and Darrel blog post for the details; it boils down to octane requirements and the high octane of ethanol. That’s also why we see a smooth, steady increase in ethanol production long before the 2007 RFS (or the 2005 RFS). Ethanol production began picking up in the late 1990s, when oil companies discovered the toxicity of MTBE, their main oxygenate and switched to ethanol as a replacement. Check out the picture:

Ethanol production started ramping up long before the Renewable Fuel Standard mandated ethanol production.

There certainly was dramatic expansion in 2007 and 2008, but the buildup had been coming for a decade before that.

I think the RFS was a bid by oil companies to get cheaper oxygenate. In other words, the RFS is a result of oil companies’ demand for ethanol, not a cause of ethanol demand. Consequently, relaxing the mandate probably won’t have much of an effect.

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Ethanol Policy Undoes the Ravages of Nature

A couple days ago, Collin Carter and Henry Miller opined in the New York Times that, “a stroke of a pen can quickly undo the ravages of nature.” The “ravages of nature” in question is the current drought, which is “ravaging” corn in the Midwest. And the pen stroke? That’s a little more complicated, but the bottom line is: they are wrong.

Carter and Miller are concerned that under current law ‘corn for ethanol’ takes precedence over ‘corn for people.’ That’s because the Renewable Fuel Standard (RFS) mandates the production and blending of 13.6 billion gallons of ethanol this year, which is roughly equivalent to 4.9 billion bushels of corn. Considering that some folks think the drought has caused farmers to lose 2 billion bushels of corn, Carter and Miller suggest that simply loosening the mandate by 20%–that’s the ‘pen stroke’–will undo half of the damage caused by the drought. But their suggestion is totally superfluous.

To understand ethanol policy, one has to delve deeper than the pages of the New York Times. Those who really understand ethanol policy (like my colleague Nick Paulson) know that currently there is a built-in safety valve that accomplishes what Carter and Miller propose, without stroking any pens. The current law gives blenders ‘credits’ (called Renewable Information Numbers (RINs)) when they exceed the mandate. These credits can be carried forward and cashed in during years when they don’t meet their quota. Because the ethanol industry has been producing like gangbusters the past couple years, blenders currently have about a billion gallons-worth of RINs–roughly equivalent to the 20% easing Carter and Miller call for.

So, their op-ed should have said, “thankfully, since we produced so much ethanol the past few years, we won’t have to worry about ethanol competing with food for corn this year.” Or more to the point, “thankfully, our ethanol policy undoes the ravages of nature.” But I guess that doesn’t sell newspapers.

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Aggies vs. Conservatives

A few days ago I blogged about the traditional ‘aggies vs. liberals‘ division on farm bill-related matters. I cited the difference in the farm bill debate between the concerns of the senators from farm states (the aggies) and the concerns of the more liberal general body of the Senate.

Well, it looks like the House is sticking to its dysfunctional ways, but there the contention is between the aggies and conservatives. According to the Boston Globe, “the [Republican] party remains stymied by internal divisions between conservatives and farm-state lawmakers on how to proceed with a broader renewal of farm subsidies and the food stamp program.”

These guys need to get their act together. Now is not the time to hold the American food supply hostage.

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Drought NOT a Harbinger of Things to Come

I grew up on a farm in Idaho. And I spent my teenage years working with, wrestling with, and cursing irrigation. Irrigation is the lifeblood of farming in Idaho. I remember vividly a year when there was a drought, and the surface water dried up. I spent the hottest days of the summer laying 12-inch diameter aluminum pipe (hot!) from a groundwater pump to a surface-water pump because the surface water had dried up. That wasn’t fun. It was a lot of work in miserable conditions in an attempt to combat the heat.

Today in Illinois, where I now live, farmers are draining the rivers attempting to combat the heat with irrigation. They don’t have irrigation here normally because a drought like this is a once-in-fifty-years event. An irrigation system you turn on once every fifty years isn’t worthwhile.

So, when I hear people citing this year’s drought as an illustration of things to come because of global warming, I don’t think they know what they’re talking about. Farmers’ aren’t stupid. If it were like this every year, they would have irrigation. And things wouldn’t be as bad as they are.

But here’s the problem: most people didn’t grow up on a farm in Idaho. They don’t know what irrigation can do. And the worst part is that scientists, with their doomsday forecasts based on dumb-farmer models1, don’t know what irrigation can do. Or they don’t want to know.

Over at Greed, Green, and Grains my good friend and oft-times coauthor Michael Roberts reiterates a claim he has been making for quite some time:

Most commentators attribute this year’s bad crop progress with drought–a lack of rainfall. The problem with traditional drought measures is that they don’t predict crop outcomes especially well. Our measure of extreme heat–degree days above 29C–predicts crop outcomes a lot better.

Michael’s claim is based on a series of papers he has been working on with Wolfram Schlenker, et al. Their PNAS paper is the most widely cited in the series. For Michael, the coup de gras is this picture, which shows a sharp decline in crop yield above a certain (cummulative) temperature2.

What they don’t show you, but what is way more important, is this picture:3

The right-hand picture illustrates the main findings reported in the paper (for corn and soybeans). The left-hand picture illustrates the effect of heat when farmers are allowed to use irrigation.

This picture illustrates the difference precipitation makes. This picture shows the analysis west of the 100-degree meridian (on the left) along side the main analysis (on the right), which only uses data east of the 100-degree meridian. In the west, farmers respond to high temperature with irrigation. In the east, farmers rely  almost exclusively on rain. The picture shows that irrigation significantly dampens4 the effect of extreme temperature. In other words, heat doesn’t matter as much as long as there is precipitation. Or, more accurately, irrigation strongly mitigates the harmful effects of heat.

So, the consequences of global warming for U.S. agriculture won’t be nearly as bad as some people claim. Farmers are smart, and they will adapt.


1 A dumb-farmer model takes the present situation and extrapolates to the future without allowing farmers to adapt (by adopting irrigation, for instance).

2 Yes, I know it’s called ‘growing degree days’, but let’s avoid the jargon for a minute, shall we?

3 Yes, I know. It’s in the supplementary appendix. But it should be on the front page!

4 Sorry, I couldn’t resist.

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Living the Dream

Bruce Babcock is now living the dream. I wonder what my tenure review committee will think about my Ultimate Objective: be on the Colbert Report. (h/t MR)

Obamacare for Our Corn

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Agricultural Subsidies Lift People Out of Poverty (part 2)

Yesterday I showed you that agricultural subsidies lift about 35,000 farmers above the poverty line.1 The question you should ask yourself, dear reader (hi dad!), is whether that really lifted them out of poverty in “the future is bright and I can’t wait to plant another crop b/c next year will be THE year” sense, or in the “I hope we get our subsidy check again next year because I want to keep our subscription to HBO” sense. Unfortunately, there is not a lot of good evidence on this.2 But here’s some interesting suggestive evidence I’ve dug up.

In 2006 133,698 farms were labelled “Limited Resource” farms by the USDA. These folks have low sales, low assets, and low income. But in 2007 only 45,990 (34 percent) of them were again labelled “Limited Resource” farms. This in spite of the fact that there were 50,000 more Limited Resource farms in 2007. In other words, it looks like poverty is transitory for most poor farmers in the U.S.

The next question you should ask yourself is what happens when we remove their safety net, i.e., direct payments? Will they recover on their own, or just fold?


1 Calculated as follows: 2.2 million farmers about 37 percent (820,000) of whom receive subsidies, which lifts 4.2 percent of them (~35,000) above the poverty line.

2 Major gripe number 1: the USDA doesn’t consistently ask the same farmers the same questions year after year. So it’s impossible to answer this and many more fundamental questions.

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Agricultural Subsidies Lift People Out of Poverty

The influence of farm payments on the poorest farm households can be seen in the farm household poverty rate. In 2010, the poverty rate among all farm households, at 14.6 percent, was almost 3 percentage points higher than the poverty rate among the general population. Among subsidized farm households, before receiving a farm subsidy the poverty rate was 16.9—45 percent higher (5.7 percentage points) than the national poverty rate that year. Subsidies have a big impact on poverty among recipient households; they reduce the poverty rate by 4.2 percentage points to 12.7. But poverty among subsidy recipients still exceeds the national poverty rate by 1 percentage point.

Today, the income distribution of farm households looks similar to the non-farm household income distribution. Farm households have higher median income (about 30 percent higher in 2010), but they also experience a higher poverty rate.

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