My brother Doug still lives on the farm. While visiting recently we talked about the recent trend to make grain into fuel. It’s been done for years but recently there has been a lot of new ethanol plants going in and using up a lot of the corn production. We don’t raise any corn on the farm but prices for wheat and barley have risen because the corn previously used for livestock feed is being pulled off the market for ethanol. Cattle, sheep, and pigs will eat chopped barley and wheat as well as corn so wheat is now at something like a 30 year high. Ignoring for now the fact that it’s not an all time high, that 30+ years ago wheat sold for more than it does today, we realize that there might be an increase in prosperity of some farmers in the near future.

Some people are fantasizing about replacing nearly all our non renewable fuels with “natural” fuels made from grain. The key word in previous sentence is fantasizing. I knew Doug had done the calculations 15 or 20 years ago and realized then farms cannot begin to supply our fuel needs and I asked him to redo the calculations. He sent me this short paper (Microsoft Word .DOC, slightly edited by me). The important information is as follows:

Comparing potential alcohol production to current petroleum production, we see that if we stop eating and make ALL of the world grain production into alcohol, we will produce:

1.77e16/1.447e17 or 12% of the energy we currently get from petroleum.

…

…we are falling behind on world food production versus consumption in the last 10 – 15 years, so there are a few billion people that will have to stop eating if the rest of us want to stop using fossil fuels and switch to biofuels.

Also on the negative side is the fact that the huge increase in agricultural production that we have seen in the last 50 years is mostly due to fertilizers that are based on natural gas. Modern agricultural production also depends on fossil fuels for farm equipment and transportation. Thus, the “renewable” biofuels are also based in part on fossil fuels.

He doesn’t take into account that a fair amount of the oil pumped from the ground is not burned as fuel but is used as lubricants, paints, and materials such as plastic. So that 12% number is wrong in that it assumes all oil is converted into energy. So you can probably boost that number up to something like 15 or 20%. But still that is assuming that the entire world’s production of grain is used for energy. So assuming that we only ask half the planet to stop eating foods that have grain products in them (no more bread, cookies, noodles, or Twinkies and don’t forget most of your meat is grain fed) we can only supply about 8 to 10% of our energy requirements with our current production levels of grain. Also he probably wasn’t aware of this recent news on converting cellulose to fuel.

Maybe we can increase production, right? Yes, some. But the last time I checked the U.S. was losing about one million acres of farm land per year. Farm land is easily converted into roads, housing developments, and shopping malls so that’s what is happening to most of that one million acres per year. Add to that dwindling supply of farm land the increasing population and the fact that most of the prime farm land is already in production and you rapidly realize biofuels aren’t going to be the answer to our energy needs.

Something no person living in the U.S. has experienced is a shortage of food. In Europe during and after WWII there were times when there just wasn’t enough food for everyone. In China and Africa it’s been even more common. But in the U.S. someone might go hungry because they didn’t have enough money for food but there was always food available.

For at least the last 15 years my brother and I have asking each other “when are things going to turn around on the farm?” They are running equipment that is over 30 years old which only keep running because they have a good machine shop and can do their own repairs and even build new parts and equipment. Things have been tough on the farm for a long time and we watched as the cost of production kept rising and the crop prices remained flat or even dropped. Dad figures the government should “set a fair price for everything and keep it there”. Nixon tried that and it didn’t work. That sort of thing will never work. It simply can’t work. There has to be a shortage or at least the threat of a shortage before the price of our crops will increase. Maybe then “things will turn around”.

Food is an interesting exercise in supply and demand. Classically one would claim that as prices go down consumption will increase. But in the U.S. today ask yourself, how much more would you eat if the price of food dropped by half? What if the price of food was 10% of present day prices? Or what if food was free? Would you and your family significantly increase your consumption? Probably not. And in the other direction, how much would you pay to avoid cutting your consumption in half? Food demand is extremely inelastic.

15 or 20 years ago there was something like a years supply of wheat in storage. Stop production, and assuming perfect transportation and distribution, and it would be a year before the supply of breads, noodles, and Twinkies disappeared. Recently that surplus has dwindled down into the neighborhood of 30 to 45 days. And during that time the price of wheat did not increase above the “noise”. Why? Because there was still a surplus and the demand is inelastic. Now, with the ethanol plants coming on line and wheat and barley replacing corn in the feedlots we might see an actual world-wide shortage of wheat in our near future. And then what happens?

That’s an interesting question. Far more interesting that what one might think at first glance. Farmers, contrary to popular impression, are not stupid. All the stupid ones went out of business years ago. What you are left with are smart farmers that were too stubborn to get a job in the city. Smart, stubborn, and making do, scrimping by for 30 years. When it looks like there is actually going to be a shortage do you think those farmers will sell their crop as soon as they get it in from the field? Or will they hold on to it for a while to get a better price? If there wasn’t going to be a shortage there will be as all those smart, stubborn farmers figure it’s payback time. It’s time to make up the missed profit for the last 30 years. They are going to sit on that wheat and wait as long as they can. And with the prices going through the roof it shouldn’t be hard for them to get the banks to loan them the money to pay their bills while they “wait for prices to peak”.

What happens next? My speculation, and everyone I have talked to about this, is that the people in the cities won’t stand for it. Once they start seeing they can’t buy an unlimited number of Twinkies and Big Macs anymore and the ones they can buy are twice as expensive as they were a couple months ago they will demand the government “do something”. Maybe then Dad will get his wish, the government will set a “fair price” for wheat and the farmers that refuse to sell at that price will have their crop forcibly taken from them. Those smart, stubborn farmers with 30 years of resentment built up will have their crops taken.

Every farmer I knew growing up owned one or more guns. Most of them went hunting. I wonder what they will hunt when the government says they have to sell their crop for less than what the market would pay for it?

Interesting times we live in…

Update: Doug made the following comments:

I am aware of cellulose.  I went on a tour last summer on WSUs conservation farm north of Pullman.  They talked about switch grass in the midwest.  It doesn’t grow well here, but we would probably grow things like Reed’s Canary grass here.  You can get more energy per acre from switch grass, but they are still working on ways to convert the cellulose to starches and sugars so the yeast can digest it.  It didn’t seem like the technological difficulties were insurmountable, but we aren’t there yet.  In 10 years, we may be replacing corn ethanol with switch grass ethanol, but I would be willing to bet that without a major crisis of some type, the world demand for energy will continue to outpace production of biofuels.  China for example is ramping up their industry and will have an insatiable thirst for energy if that continues to go well for them.

The second point is what happens when we actually have a shortage of food.  First off, the wealthy people in the world, (Americans and Europeans) won’t have a food shortage.  Africa, the poor contries in the middle east and south east asia will all be unable to buy food.  They can’t afford it right now, so we give them a lot of food.  If the price of wheat triples, it would then cost a whopping $0.27/lb.  This should barely be measurable when you buy a big mac or other prepared foods.  Breakfast cereals often cost that much per ounce, so I don’t think the American consumer will get hurt that bad.  What I do think will happen is the American people will feel empathy for the starving people of the world and the guilt that people of western european culture seem so eager to feel will take over.  The media will start scolding us for taking food out of the mouths of starving children in Africa to put in our SUVs.  The political correctness of biofuels will butt head to head with the political correctness of feeding the starving children of the world.  The media, which controls the thinking of the American people and which takes sides in nearly every issue will have to decide if we want biofuels or if we want to continue fueling the population explosion of undeveloped countries.  My guess is they will instruct the American people through biased reporting to send our food to the starving children of the world.  Politicians will respond accordingly and the ethanol mandate and biodiesel tax credits will be swiped away as an experiment gone wrong.

Where does that leave us with energy?  I am not certain, but I suspect we will be drilling for more oil and speeding up the process of depleting that natural resource.  Greenhouse fears are the fad right now, but will probably fade away when people like Al Gore realize they can’t enjoy the things they want in life without consuming fossil fuels.

Update2: I don’t expect prices to just triple if a shortage occurs. Prices tripled once before when the Russians had a crop failure and started buying a noticeable portion of the worlds supply. They didn’t produce a world wide shortage just reduced the reserves. If there is an actual shortage I wouldn’t be surprised to see prices increase by a factor of 10. This might increase the cost of processed food in the U.S. by something like 25 to 50%. Not so much that most people in the U.S. would be unable to buy it and most probably wouldn’t change their shopping habits. But something Doug did bring up will put some elastic into the demand. We give a lot of food away to other countries. Those give aways are almost for certain dollar based rather than quantity based. As the price rises less food can be purchased for the same amount of money. Hence the demand (demand in the sense that people with money to actually purchase the food as opposed to just being hungry but without the means to buy it) will decrease some with increasing prices. And of course what will happen when people start actually going hungry in some of those other countries? People will die both from actual lack of food and from fighting over what food is available. Interesting times…