A newly important part of the a-maize-ing story is ethanol subsidies. [Insert usual subsidies rant] It's been somewhat amusing to see many of the old critics go buns up for ethanol given that it makes no difference to the environment or the economy if the maize subsidies end up feeding pigs or making ethanol. Some main stream push back has begun.

A few agricultural economists and food industry executives are quietly worrying that ethanol, at its current pace of development, could strain food supplies, raise costs for the livestock industry and force the use of marginal farmland in the search for ever more acres to plant corn.

"This is a bit like a gold rush," warned Warren R. Staley, the chief executive of Cargill, the multinational agricultural company based in Minnesota. "There are unintended consequences of this euphoria to expand ethanol production at this pace that people are not considering."

Mr. Staley has his own reasons to worry, because Cargill has a stake in keeping the price of corn low enough to supply its vast interests in processed food and livestock.

But many energy experts are also questioning the benefits of ethanol to the nation's fuel supply. While it is a renewable, domestically produced fuel that reduces gasoline pollution, large amounts of oil or natural gas go into making ethanol from corn, leaving its net contribution to reducing the use of fossil fuels much in doubt.

The impacts are a bit more complicated than that since there are other ways to do livestock agriculture, grains can be imported, and existing practices can be made more resource efficient. And it isn't clear that higher food prices are a real problem. They are arguably too low now though some will need assistance to bear an increase.

But the threats noted are real. Acreage could expand if prices are up for grains. Grasslands and fallowed farm lands may go into grain production. Another possibility is that grain feeding of livestock will be reduced. Some of the most advanced production of ruminant livestock is done without grain - for example in New Zealand, Australia and parts of S. America - and it is a growing practice in the US as well. It has mostly been a boutique practice for premium markets - health nuts and gourmet foods etc. - but this may help make it more economically attractive for commodity producers too.

There's a lot of room for improvement in rangeland management. Some recent experiments on Canadian range lands showed that proper management and fertilization doubled production as well as doubling the protein of the forage. In a sense it's like producing 4 times as much since protein is a scarce item. These are lands not suited to cropping but just dandy for grazing. Even greater gains can be made if the use of improved cultivars increases.

It isn't that this is news so much as that it is a difficult business decision when grain is cheap. It really is a different business plan using a different skill set. It requires a different mind set and due consideration of markets and timing, and is perhaps even more subject to weather shocks. There aren't as many risk spreading methods as there are for grain based systems.

More expensive grains will also increase the use of byproducts. This is already a well developed practice in some areas. In my neighborhood where ag is king little goes to waste. Nearly every bit of organic matter discarded by packing houses or processors is used for livestock feed. Nutritionists analyse it and mix it with other "wastes" to produce a mixed ration that meets a specification. Much of it is used in dairies. Even the ethanol plant wastes are used this way.

It seems to me that we would be far better off to not subsidize maize at all. Let the prices rise closer to true value and let it find its best use. That may be ethanol if oil prices remain high and mandates remain in place.

. . . the current incentives to make ethanol from corn are too attractive for producers and investors to worry about the future. With oil prices at $70 a barrel sharply lifting the prices paid for ethanol, the average processing plant is earning a net profit of more than $5 a bushel on the corn it is buying for about $2 a bushel, Mr. Basse said. And that is before the 51-cent-a-gallon tax credit given to refiners and blenders that incorporate ethanol into their gasoline.

"It is truly yellow gold," Mr. Basse said.

The price of maize could rise quite a bit before ethanol producers are hurt at these prices. If we think it through it may be that our focus should be on seeing that maize farmers pay the full cost of production - considering resource impacts of all sorts (such as water) - rather than giving them subsidies. Subsidies, if used at all, would be better if they targeted communities and the environment than supporting commodity production.

Update:

Becker does Ag

Another argument in defense of farm subsidies is that they contribute to a better environment. Some of the subsidies may do this by reducing population density and pollution, but many others add to environmental damage. For example, subsidies to irrigation and other water use by farmers is one of the major ways that fresh water is wasted. Environmental and geopolitical arguments are used to justify the large subsidies to ethanol production from corn in the US. Ethanol helps reduce the West's dependence on oil because ethanol is a substitute for gasoline. . .

Ethanol not only reduces dependence on oil imports, but also ethanol based fuel cause less pollution than gasoline does. Ethanol probably also uses less energy, although that is debated since both the plants that produce ethanol, and the fertilizers that help to grow corn, use considerable quantities of natural gas. The US has subsidized ethanol production from corn primarily to help corn growers rather than to reduce energy use since it is combined with a steep tariff on imports of ethanol from elsewhere. These imports would come mainly from Brazil that produces ethanol from sugar cane at a much lower cost than the US production from corn. Instead of subsidizing domestic production of ethanol, a much wiser policy for the US would be to eliminate these tariffs and import ethanol from democratic and friendly countries like Brazil that can produce ethanol more cheaply.

Semi-interesting, but he mailed it in. There's no insight, just a list of common arguments for and against with little domain knowledge or useful analysis. He seems to be unaware of history as well.

It may seem paradoxical that farmers are typically rather heavily taxed in poor countries, like India and China, where they constitute a large fraction of the population, and are subsidized in rich countries dominated by cities and towns. But the economic analysis of interest group politics demonstrates that small groups are often much more powerful politically than large groups, even in democracies where large groups would seem to command more votes. The explanation is that small groups may be organized more easily-although farmers tend to be spread out geographically- and the per capita tax on others to finance the subsidy to small groups tends to be smaller than the per capita cost of subsidizing large groups.

For most of history the "taxes on the farmer fed us all", as the singer protested, but that seems to reverse everywhere once industrialization, urbanization and development is achieved. I think it's not about politics, it's about economics. When a large share of GDP comes from agriculture - even if that is a small number in absolute terms - then a large share of taxes will come from there as well. There are no alternatives. Taxes follow the money. Duh!

Posner too.

Our ethanol subsidy is a particulary disgraceful example of the genre, especially given the availability of much cheaper sugar-based Brazilian ethanol blocked by a high tariff from competing with the ethanol produced from our corn. It is possible though unproven that ethanol as a fuel involves a net reduction in carbon dioxide emissions compared to gasoline and so may help to limit global warming. I qualify with "unproven" because while ethanol is not a fossil fuel and so burning it does not emit carbon dioxide, its production requires fossil fuel. Even if ethanol as a fuel has definite advantages from the standpoint of controlling global warming, this is a poor argument for a subsidy of it, as the subsidy can distort the efficient choice of inputs into the manufacture of fuel. Better would be a tax on carbon dioxide emissions; this would give producers and consumers of fuels and of products utilizing fuels, such as cars and electricity, an incentive to search out the cheapest substitutes for fossil fuels, which might or not include ethanol.

A tax is better than a subsidy? Well, maybe for exceedingly small values of "better", but they are both bad because they seek to manipulate a socio-economic system without useful information, proper incentives or reasonable objectives. It politicizes, and thus degrades, the socio-economic system. Hustlers will game the system coming and going. The producers, legislators and regulators all get in bed together and bump nasties with no continuing thought for good governance. That was just the cover story they used for their tryst.