Do you support Bill C33? This is the Canadian legislation requiring biofuels as a percentage of all fuels sold in Canada. The legislation currently before the Senate, allows the Government to require up to 5% renewables in all gasoline sold here or up to 2% of all diesel fuels. I was asked this question recently and my answer is yes, BUT! Here’s why.
Some people claim that converting corn to ethanol is driving up the price of food. Others say it is taking food away from the poor. Let’s deal with the price of food first.
Commodities are enjoying record high prices due to droughts, crop failures, increased demand from China and India, and financial speculation. Some of the increase in the price of corn comes from the diversion of 30% of the US corn crop to ethanol production. The elevated price of corn does affect the price of some other crops and in Canada there is some conversion of wheat as well. However the long term price of wheat and other grains continues to go down not up. If you factor inflation out of the price, wheat sold for $800/tonne in 1918 but that was during wartime. At the end of WWII it peaked again at almost $600/tonne. The long term trend is around $200/tonne except for occasional spikes, like now. When people criticize our government for an ethanol policy that will increase the price of farm commodities, I say hurray because the current high prices won’t last and anything that prevents farm bankruptcy is a good thing.
Now what about the other argument, that biofuels take food away from the poor? This is a more powerful argument but it is confusing if we only look at it from a North American perspective. We think of agriculture and oil both in terms of exports not imports. In Europe, most oil is imported. Europeans want 10% of all transport fuels to be agriculturally based by 2020. According to the UN Right to Food program, Europeans would have to dedicate 70% of all their arable land to this purpose in order to meet this target. Clearly they expect to meet their targets by importing agrofuels from Latin America, Africa and Asia. Not only can they preserve their own farm land but it is cheaper too. Ethanol that costs $1 to produce in Europe costs $0.30 in Brazil.
So, it is in the southern hemisphere where food will be taken away from the poor. Already edible maize is being replaced by industrial maize. Last year the cost of maize tortillas in Mexico increased in price by 400% causing riots by people for whom this is their staple food.
My guess is everyone would agree that the real payoff with this new technology is not the conversion of seeds (food) into biofuels. It is the conversion of waste (used oils like French fry oil) into biodiesel and wheat straw and wood chips into what is known as cellulosic ethanol. My “yes” has to do with my support of a market for biofuels, making the investment in new technology commercially viable and increasing the income of farmers. My “BUT” means I refuse to be indifferent to the hunger of peasant farmers in the global south. Our goal has to be the conservation of fuel, conversion of waste and the guarantee of the right to food.
Friday, June 27, 2008
Tuesday, June 3, 2008
Speculators Have Two Faces
Speculators are never popular. We associate such people with naked greed. They profit from our misery. No one wants to be known as a speculator.
An alternative word is investor or risk manager. To be an investor is to have confidence in the future. To be a risk manager is to be prudent and wary, concerned about dangers ahead.
These two words can sometimes be two faces of the same activity. When I purchase life insurance, I am managing a risk. I don’t often think about how the insurance company that sells me the policy is speculating on the chances of my death, even though they are.
Farmers invest in the future with every spring planting. They manage their risk by pre-selling their crop. Investors purchase those contracts for future delivery because they are speculating that the price will be higher on the delivery date than the price they have paid ahead of time. In order for this market to work properly, farmers need investors prepared to speculate and investors need farmers prepared to speculate too. When the environment stays stable, this market works, and adds to the stability overall.
The market for managing risk in food commodities has started to become dysfunctional. The futures market for wheat on the Chicago Board of Trade is twice as volatile in 2008 as it was in 2007. How volatile is that? Well, that’s six times as volatile as the price of gold, the Dow Jones Industrial Average or the price of European currency on the foreign exchange market.
What is the explanation? Some people blame the drought in Australia, and some blame the low level of wheat stocks world-wide. After all, world wheat consumption has exceeded production in six of the last eight years. Some blame a general increased demand from China and some blame a spill over effect of tight rice supplies and transferred demand. Some even blame increased ethanol use since 30% of the US corn crop is now going to ethanol production and farmers are switching out of wheat and into corn.
Probably all of these factors contribute to the volatility but drought and changes to supply and demand are factors we have seen before and they haven’t had this level of impact. One of the new features is the dramatic increase in investments made by Wall Street pension and hedge funds. According to the New York Times, as much as $300 billion of new money has been invested in these speculative plays. Although the Chicago Board of Trade has offered futures contracts since 1959, only recently have they also offered options on those futures contracts.
Where have we seen this before? In 1971, when President Nixon took the American dollar off the gold standard, a market was created for foreign exchange. Such a market always existed but the volatility of the market was very low since most currencies were related officially or unofficially to the American dollar and it was pegged to the price of gold at $35/ounce. The market was considered so insignificant, the Swiss based Bank of International Settlements didn’t start measuring it until the 1980s, and then only on an experimental basis. That same institution now estimates that market to handle over $3 trillion dollars daily. The danger of this market is that it is bigger than all of its regulatory bodies. When the market was only a third of its current size it was already larger than all of the reserves of all of the central banks of all of the industrialized nations put together.
There is not yet a consensus on the causes of increased volatility in the commodities markets, but, if I had to speculate (!) I’d say the unregulated increase in speculative investments has destabilized long standing relationships between producers and consumers, increased costs to farmers, and increased risks to us all.
For other moral economy blogs see www.christopherlind.blogspot.com
An alternative word is investor or risk manager. To be an investor is to have confidence in the future. To be a risk manager is to be prudent and wary, concerned about dangers ahead.
These two words can sometimes be two faces of the same activity. When I purchase life insurance, I am managing a risk. I don’t often think about how the insurance company that sells me the policy is speculating on the chances of my death, even though they are.
Farmers invest in the future with every spring planting. They manage their risk by pre-selling their crop. Investors purchase those contracts for future delivery because they are speculating that the price will be higher on the delivery date than the price they have paid ahead of time. In order for this market to work properly, farmers need investors prepared to speculate and investors need farmers prepared to speculate too. When the environment stays stable, this market works, and adds to the stability overall.
The market for managing risk in food commodities has started to become dysfunctional. The futures market for wheat on the Chicago Board of Trade is twice as volatile in 2008 as it was in 2007. How volatile is that? Well, that’s six times as volatile as the price of gold, the Dow Jones Industrial Average or the price of European currency on the foreign exchange market.
What is the explanation? Some people blame the drought in Australia, and some blame the low level of wheat stocks world-wide. After all, world wheat consumption has exceeded production in six of the last eight years. Some blame a general increased demand from China and some blame a spill over effect of tight rice supplies and transferred demand. Some even blame increased ethanol use since 30% of the US corn crop is now going to ethanol production and farmers are switching out of wheat and into corn.
Probably all of these factors contribute to the volatility but drought and changes to supply and demand are factors we have seen before and they haven’t had this level of impact. One of the new features is the dramatic increase in investments made by Wall Street pension and hedge funds. According to the New York Times, as much as $300 billion of new money has been invested in these speculative plays. Although the Chicago Board of Trade has offered futures contracts since 1959, only recently have they also offered options on those futures contracts.
Where have we seen this before? In 1971, when President Nixon took the American dollar off the gold standard, a market was created for foreign exchange. Such a market always existed but the volatility of the market was very low since most currencies were related officially or unofficially to the American dollar and it was pegged to the price of gold at $35/ounce. The market was considered so insignificant, the Swiss based Bank of International Settlements didn’t start measuring it until the 1980s, and then only on an experimental basis. That same institution now estimates that market to handle over $3 trillion dollars daily. The danger of this market is that it is bigger than all of its regulatory bodies. When the market was only a third of its current size it was already larger than all of the reserves of all of the central banks of all of the industrialized nations put together.
There is not yet a consensus on the causes of increased volatility in the commodities markets, but, if I had to speculate (!) I’d say the unregulated increase in speculative investments has destabilized long standing relationships between producers and consumers, increased costs to farmers, and increased risks to us all.
For other moral economy blogs see www.christopherlind.blogspot.com
Monday, March 17, 2008
Is Agriculture a Public Good?
Soft fruit growers in Ontario are currently caught between two competing visions of the role of government in protecting the public interest. CanGro Foods (part of Kraft Foods Canada until 2006) recently announced that they were closing their fruit and vegetable processing plants near Niagara-on-the-Lake (St. David’s) and London (Exeter). This closure will put nearly 300 people out of work. It will also leave 150 pear and peach growers without a buyer for their products. The pear harvest of 3,000 tons is worth $1.8 million while 6,000 tons of clingstone peaches are worth $2.5 million. One more plant closure might not seem remarkable except that the St. David’s plant is over 100 years old and is the last tender fruit cannery east of the Rocky Mountains.
The federal government has refused to stop the closure but has offered about $1600 per acre to help with the costs of removing the fruit trees. According to at least one study, the cost of removing trees and replanting for a different crop is closer to $15,000 per acre. It only takes three months to close a processing plant but it takes 10 years to rip out mature pear trees, replant and bring the fruit to a marketable stage. How long does it take to secure the future of domestic agriculture in Canada?
Underneath the question of whether the government should be directly involved in ensuring the viability of domestic agriculture in Canada lies a conflict of visions over the meaning of the public interest. On the right side of the debate is a vision of the public interest as the accumulation of intersecting private activities. They have no meaning as such but they do generate conflict and the role of government is to set the rules of conduct so disputes can be resolved. When modern American style conservatives call for small government, this is what they have in mind. The federal government response to the CanGro closure reflects this vision.
On the left side of the debate is a vision of the public interest as a version of the common good. Some activities contribute to the common good and some do not. Protecting the most vulnerable members of our society would contribute to the common good even though they do not represent a numerical majority. From this perspective the role of the government is to actively contribute to, promote and defend those aspects of our common life that help to define who we are and who we want to be.
Donald Ziraldo is the former President and co-founder of Inniskillin Wines. He thinks another buyer for the cannery could be found if a market for its production could be secured. Since CanGro will be keeping their Del Monte, Aylmer and Ideal brands, even if they’re now filled with pear halves from China, he wants the government to help create a new “Niagara” brand. He then wants the Ontario Government to adopt a “buy local” policy for all its institutions. The Government of Ontario employs 65,000 people and is the second largest employer in the Province after the Federal Government. If the Government adopted a “buy local” policy just for the food services catering to employees, and if every employee spent just $5 a day on lunches and snacks, $6.5 million a month would be directed towards local agriculture.
This is a bold and imaginative vision but it treats domestic agriculture as a matter of the public interest, and the government as its defender. Where we stand on the vision has a direct and practical impact on the future of domestic agriculture in Canada.
The federal government has refused to stop the closure but has offered about $1600 per acre to help with the costs of removing the fruit trees. According to at least one study, the cost of removing trees and replanting for a different crop is closer to $15,000 per acre. It only takes three months to close a processing plant but it takes 10 years to rip out mature pear trees, replant and bring the fruit to a marketable stage. How long does it take to secure the future of domestic agriculture in Canada?
Underneath the question of whether the government should be directly involved in ensuring the viability of domestic agriculture in Canada lies a conflict of visions over the meaning of the public interest. On the right side of the debate is a vision of the public interest as the accumulation of intersecting private activities. They have no meaning as such but they do generate conflict and the role of government is to set the rules of conduct so disputes can be resolved. When modern American style conservatives call for small government, this is what they have in mind. The federal government response to the CanGro closure reflects this vision.
On the left side of the debate is a vision of the public interest as a version of the common good. Some activities contribute to the common good and some do not. Protecting the most vulnerable members of our society would contribute to the common good even though they do not represent a numerical majority. From this perspective the role of the government is to actively contribute to, promote and defend those aspects of our common life that help to define who we are and who we want to be.
Donald Ziraldo is the former President and co-founder of Inniskillin Wines. He thinks another buyer for the cannery could be found if a market for its production could be secured. Since CanGro will be keeping their Del Monte, Aylmer and Ideal brands, even if they’re now filled with pear halves from China, he wants the government to help create a new “Niagara” brand. He then wants the Ontario Government to adopt a “buy local” policy for all its institutions. The Government of Ontario employs 65,000 people and is the second largest employer in the Province after the Federal Government. If the Government adopted a “buy local” policy just for the food services catering to employees, and if every employee spent just $5 a day on lunches and snacks, $6.5 million a month would be directed towards local agriculture.
This is a bold and imaginative vision but it treats domestic agriculture as a matter of the public interest, and the government as its defender. Where we stand on the vision has a direct and practical impact on the future of domestic agriculture in Canada.
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