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The US biofuel mandate helps farmers, but does little for energy security and harms the environment

The US has required motor fuels to contain 10% biofuels since 2005. As this program nears a key milestone in 2022, farm advocates want to expand it while critics want to pare it back or repeal it.

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Surplus corn piled outside a farmer's co-op storage facility in Paoli, Colorado. Robert Nickelsberg/Getty Images

If you’ve pumped gas at a U.S. service station over the past decade, you’ve put biofuel in your tank. Thanks to the federal Renewable Fuel Standard, or RFS, almost all gasoline sold nationwide is required to contain 10% ethanol – a fuel made from plant sources, mainly corn.

With the recent rise in pump prices, biofuel lobbies are pressing to boost that target to 15% or more. At the same time, some policymakers are calling for reforms. For example, a bipartisan group of U.S. senators has introduced a bill that would eliminate the corn ethanol portion of the mandate.

Enacted in the wake of the attacks of Sept. 11, 2001, the RFS promised to enhance energy security, cut carbon dioxide emissions and boost income for rural America. The program has certainly raised profits for portions of the agricultural industry, but in my view it has failed to fulfill its other promises. Indeed, studies by some scientists, including me, find that biofuel use has increased rather than decreased CO2 emissions to date.

Current law sets a target of producing and using 36 billion gallons of biofuels by 2022 as part of the roughly 200 billion gallons of motor fuel that U.S. motor vehicles burn each year. As of 2019, drivers were using only 20 billion gallons of renewable fuels yearly – mainly corn ethanol and soybean biodiesel. Usage declined in 2020 because of the pandemic, as did most energy use. Although the 2021 tally is not yet complete, the program remains far from its 36 billion-gallon goal. I believe the time is ripe to repeal the RFS, or at least greatly scale it back.

Higher profits for many farmers

The RFS’s clearest success has been boosting income for corn and soybean farmers and related agricultural firms. It also has built up a sizable domestic biofuel industry.

The Renewable Fuels Association, a trade group for the biofuels industry, estimates that the RFS has generated over 300,000 jobs in recent years. Two-thirds of these jobs are in the top ethanol-producing states: Iowa, Nebraska, Illinois, Minnesota, Indiana and South Dakota. Given Iowa’s key role in presidential primaries, most politicians with national ambitions find it prudent to embrace biofuels.

The RFS displaces a modest amount of petroleum, shifting some income away from the oil industry and into agribusiness. Nevertheless, biofuels’ contribution to U.S. energy security pales compared with gains from expanded domestic oil production through hydraulic fracturing – which of course brings its own severe environmental damages. And using ethanol in fuel poses other risks, including damage to small engines and higher emissions from fuel fumes.

For consumers, biofuel use has had a varying, but overall small, effect on pump prices. Renewable fuel policy has little leverage in the world oil market, where the biofuel mandate’s penny-level effects are no match for oil’s dollar-scale volatility.

Biofuels are not carbon-neutral

The idea that biofuels are good for the environment rests on the assumption that they are inherently carbon neutral – meaning that the CO2 emitted when biofuels are burned is fully offset by the CO2 that feedstocks like corn and soybeans absorb as they grow. This assumption is coded into computer models used to evaluate fuels.

Leading up to passage of the RFS, such modeling found modest CO2 reductions for corn ethanol and soybean biodiesel. It promised greater benefits from cellulosic ethanol – a more advanced type of biofuel that would be made from nonfood sources, such as crop residues and energy crops like willow and switchgrass.

But subsequent research has shown that biofuels are not actually carbon-neutral. Correcting this mistake by evaluating real-world changes in cropland carbon uptake reveals that biofuel use has increased CO2 emissions.

One big factor is that making biofuels amplifies land-use change. As harvests are diverted from feeding humans and livestock to produce fuel, additional farmland is needed to compensate. That means forests are cut down and prairies are plowed up to carve out new acres for crop production, triggering very large CO2 releases.

Corn kernels pour into a bin.
About 40% of corn produced in the U.S. is used to make ethanol. Shuli Hallak/Getty Images

Expanding farmland for biofuel production is also bad for the environment in other ways. Studies show that it has reduced the abundance and diversity of plants and animals worldwide. In the U.S., it has amplified other adverse impacts of industrial agriculture, such as nutrient runoff and water pollution.

The failure of cellulosic ethanol

When Congress expanded the biofuel mandate in 2007, a key factor that induced legislators from states outside the Midwest to support it was the belief that a coming generation of cellulosic ethanol would produce even greater environmental, energy and economic benefits. Biofuel proponents claimed that cellulosic fuels were close to becoming commercially viable.

Almost 15 years later, in spite of the mandate and billions of dollars in federal support, cellulosic ethanol has flopped. Total production of liquid cellulosic biofuels has recently hovered around 10 million gallons per year – a tiny fraction of the 16 billion gallons that the RFS calls for producing in 2022. Technical challenges have proved to be more daunting than proponents claimed.

Man in a field of tall grass.
Making cellulosic ethanol from plants like switchgrass is complicated and remains unaffordable despite large subsidies. Karen Kasmauski/Getty Images

Environmentally speaking, I see the cellulosic failure as a relief. If the technology were to succeed, I believe it would likely unleash an even more aggressive global expansion of industrial agriculture – large-scale farms that raise only one or two crops and rely on highly mechanized methods with intensive chemical fertilizer and pesticide use. Some such risk remains as petroleum refiners invest in bio-based diesel production and producers modify corn ethanol facilities to produce biojet fuel.

Ripple effects on lands and Indigenous people

Today the vast majority of biofuels are made from crops like corn and soybeans that also are used for food and animal feed. Global markets for major commodity crops are closely coupled, so increased demand for biofuel production drives up their prices globally.

This price pressure amplifies deforestation and land-grabbing in locations from Brazil to Thailand. The Renewable Fuel Standard thus aggravates displacement of Indigenous communities, destruction of peatlands and similar harms along agricultural frontiers worldwide, mainly in developing countries.

Some researchers have found that adverse effects of biofuel production on land use, crop prices and climate are much smaller than previously estimated. Nevertheless, the uncertainties surrounding land use change and net effects on CO2 emissions are enormous. The complex modeling of biofuel-related commodity markets and land utilization is impossible to verify, as it extrapolates effects across the globe and into the future.

Rather than biofuels, a much better way to address transportation-related CO2 emissions is through improving efficiency, particularly raising gasoline vehicle fuel economy while electric cars continue to advance.

[Get The Conversation’s most important coronavirus headlines, weekly in a science newsletter]

A stool with two weak legs

What can we conclude from 16 years of the RFS? As I see it, two of its three policy legs are now quite wobbly: Its energy security rationale is largely moot, and its climate rationale has proved false.

Nevertheless, key agricultural interests strongly support the program and may be able to prop it up indefinitely. Indeed, as some commentators have observed, the biofuel mandate has become another agribusiness entitlement. Taxpayers probably would have to pay dearly in a deal to repeal the RFS. For the sake of the planet, it would be a cost worth paying.

John M. DeCicco, Ph.D., is a Research Professor Emeritus retired from the University of Michigan. While remaining professionally active in energy and environmental research, he currently receives no funding and has no relevant relationships beyond his academic affiliation.

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Economics

The Judder Moment Just Crashed Markets

The Judder Moment Just Crashed Markets

Authored by Bill Blain via MorningPorridge.com,

“I love the smell of burning Napalm in the morning…”

Did…

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The Judder Moment Just Crashed Markets

Authored by Bill Blain via MorningPorridge.com,

“I love the smell of burning Napalm in the morning…”

Did you feel the Earth shake and judder? When dull, boring, predictable retail giants crash 25% intra-day, time to take notice. Boom/Bust is back – and this time its serious. Anyone for the last few choc-ice?

Ouch.

This won’t help, but I’m going to keep it short this morning, because I am delighted to report waking up this morning with a proper “everything’s-back-to-normal” hangover!

Yesterday I had a “proper” lunch with clients in the City, followed by a few hours pretending to work in our fantastic new offices (where we are adapting to hot-desking (new people to speak to everyday), and working from home when able), before myself and some colleagues snuck out to try out the posh wine bar around the corner (excellent Alberino). Then it all went deliciously wrong at the first Shard post-pandemic party. Not sure what I was drinking, but it was all Julian’s fault!

She-who-is-Mrs-Blain picked me up late from the train station, and hazarded the observation I was a tad squiffy. She won a NSS award for her observational candour.

Blain is available for lunches whenever… Life is back to normal.

Unfortunately.. markets are not..

Just as I start to enjoy London again, we’ve got 9% UK Inflation, a developing currency crisis, and to cap it all.. Markets just had a cardiac event.

Did you feel the Earth shake and shudder as US retail numbers confirmed everything we feared about recession, inflation and consumer confidence? It’s time to pay the bill for the exuberant excesses of the 2009-2021 bull market.

As the music slows, the world is spinning into a proper, full-on, consumer led recession. On Tuesday it was Walmart’s disappointing numbers, and yesterday Target’s precipitous 25% drop on the back of retail misses sent the pictures dropping off the wall. This morning, the tumbles are continuing across Occidental markets after Tencent released equally shocking numbers as covid, lockdowns, and cost of living concerns hammer spending.

When solid, dull, boring and predictable retail businesses like Target are crashing 25% intraday… that’s as good a time as any to worry. The scale of the market crash is being magnified by the number of folk who’ve been expecting it, but also algo/computer led sell programmes kicking in as the market down-spikes.

Brace, Brace, Brace… I feel a Terrible Thursday coming on… and, to be blunt.. I’d rather have a nice quiet day and a couple of aspirins…

Not going to happen. I have a whole round of “told-you-so” calls to make! Did I not write a few weeks ago that Musk would try to wriggle out his Twitter deal? Oh, yes I did… (And Telsa just got booted off the S&P ESG index..)

Frankly… I am surprised the market was “surprised” by supply chain disruptions, rising fuel and freight costs, inflation outstripping wages, and crashing consumer confidence impacting numbers at leading retailers.. Who would have thought.. eh?

Recessions are a normal feature of the business cycle.. Whatever Gordon Brown ill-advisedly once said about the Boom and Bust cycle being over, it clearly isn’t. But what we are seeing now is different – central bank monetary experimentation has been delaying and putting this off for over a decade..

Think of it as the coiled spring of markets has been tensioned, and storing up a decade of distortion – well… it just sprung.. (Oh dear.. its going to be a morning of bad metaphors…)

On Monday I warned readers this weeks was going to be heavy on Central Banks – and sure enough.. they are all I’ve really written about. But they are what is driving these manic markets – the unravelling of the last 14 years of Central Bank monetary distortion. In the normal business cycle the booms and bust come with the inevitability of the rising/falling tide. The wonderful sand-castles built on the beach of consumer spending is washed away… and you rebuild it tomorrow.. bigger and better..

This is different. We’ve been putting this off for too long. This is a tidal wave that threatens the very beach itself.

Yesterday I highlighted how a decade of central bank monetary distortion has changed the way capitalism works – I explained one of the reasons Boeing has gone from great to terrible company was the distorting effects of easy liquidity changing a brilliant engineering company to a terrible financial slash and burner.

The same kind of distorting behaviours are going to become apparent across the business landscape in coming months. Normally a global crash exposes which investors are swimming in threadbare underwear.. This time, it’s going to expose a raft of companies struggling to cope with higher rates and discovering underinvestment and too much squandered on stock buybacks has left them fatally vulnerable..

It’s going to be felt particularly in the corporate bond markets.. Whatever the rating agencies say about healthy corporate balance sheets, I’ve heard that BS before. Defaults are going to spike.. which is an opportunity in itself.

What we now know is central banks tinkering with markets, keeping rates artificially low to drive growth (which never really happened because all the liquidity went into financial assets), has consequences. Now they will try to calm activity and drive down inflation by rising rates… but we’re passed all that now. This is entering a chaotic phase.

Excellent. Chaos spells opportunity!

Stagflation is on the near horizon. Global stocks are being hammered and the bond market will be next.. It’s likely to get very messy indeed, and whatever markets hope for in terms of renewed central bank interventions to stop chaotic markets making a bad recession into a worse global depression… it’s just not likely to happen…

Someone switch off Jim Morrison and the Door’s album spinning on the record deck… This is the end…. 

Now.. in the meantime… I want to buy Lithium – if anyone is a seller, let me know. And, do I have a deal for you in the Petchem sector… I was speaking to a major oil figure yesterday who told me.. “I’m confident we’ll be shipping more oil products in 2050 than we are today.” If you like that tale, drop me a line…

Tyler Durden Thu, 05/19/2022 - 08:50

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Baby formula industry was primed for disaster long before key factory closed down

The closure of a factory in Michigan is the incident that put new parents across the US on edge, but the real causes for the shortage of baby formula are…

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Cities are trying to address the baby formula shortage with community drives. AP Photo/David J. Phillip

The conditions that led to a shortage of baby formula were set in motion long before the February 2022 closure of the Similac factory tipped the U.S. into a crisis.

Retailers nationwide reported supplies of baby formula were out of stock at a rate of 43% during the week ended May 8, 2022, compared with less than 5% in the first half of 2021. In some states, such as Texas and Tennessee, shortages were over 50%, which has prompted parents to travel long distances and pay exorbitant sums of money to grab dwindling supplies of formula for their babies.

News that the Food and Drug Administration and Similac-maker Abbott have reached a deal to reopen the formula factory in Sturgis, Michigan, is welcome news for desperate parents, but it will do little to alleviate the shortage anytime soon. This is in no small part because of the very nature of America’s baby formula industry.

I research and teach supply chain management, with a special focus on the health care industry. The closure of the Similac factory may have lit the fuse for the nationwide shortage, but a combination of government policy, industry market concentration and supply chain issues supplied the powder.

What prompted the baby formula shortage

On Feb. 17, Abbott initiated a voluntary recall after four infants were hospitalized with infections from the bacteria Cronobacter sakazakii – two of them died – after consuming baby formula manufactured in their Sturgis facility. The factory was also shut down.

The FDA has identified no new cases but has not yet approved reopening the Sturgis facility, which is responsible for about half of Abbott’s U.S. supply. Abbott said it entered into a consent decree with the FDA that paves the way to reopening the facility once certain conditions are met.

Shortages of baby formula have led major U.S. retailers including Target, CVS, Walgreens and Kroger to restrict the amount of formula a consumer may purchase. These shortages are disproportionately hurting low-income families and those who do not have the resources to travel long distances to find alternative sources of baby formula.

Shelves at a a grocery store are mostly bare with a small number of baby formula packages here and there
Baby formula is in short supply across the U.S. AP Photo/Michael Conroy

Government-created monopolies

The root of the problem begins with a concentration of production.

Two companies – Abbott and Reckitt Benckiser, which makes Enfamil – dominate the industry with about 80% of the U.S. market. Nestlé, which sells baby formula in the U.S. under its Gerber brand, controls another 10%.

Part of the reason these companies are so entrenched in their position is that Abbott, Reckitt and Nestlé are the only makers approved by the U.S. government to provide baby formula through the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC, which provides supplemental food to low-income families.

WIC, which reimburses companies at 15% of the wholesale cost, is responsible for 92% of supermarket sales of milk-based powder formula in 12-to 16-ounce containers and 51% of all sales in other sizes.

The federal government provides WIC grants to each state, which then contracts with one of the three companies. While WIC is a critical program to feed the most vulnerable, government support of this program has the unintended consequence of creating a de facto monopoly in each state.

The amount of WIC funding to these three established companies makes it difficult for any startup to make significant inroads in the baby formula industry. There is little chance they can capture the market share necessary to justify a significant investment. Since only a handful of manufacturing facilities are approved for production of baby formula in the U.S., startups don’t have the volume required to produce in these facilities.

Import restrictions

Another reason for the intense concentration is import controls.

About 98% of the formula consumed in the U.S. is produced domestically, whether by a U.S. or international company. While facilities abroad such as those in Mexico, Chile, Ireland and the Netherlands meet the FDA’s nutrition standards, a failure to meet its labeling guidelines prevents them from exporting to the U.S. As a result, some consumers order unapproved formula over the internet from Europe and elsewhere, which may then be confiscated at the border.

International manufactures also face high tariffs, which can be as high as 17.5% depending on volume. That’s one reason Canadian producers, which are subsidized by their government, have mostly steered clear of the U.S. market. And the United States Mexico Canada Agreement, which came into force in 2020, included a provision that made it even harder for Canada to ship baby formula south in an effort to protect domestic producers.

‘Lean’ supply chains

The pandemic-related problems that have beleaguered global supply chains have also played a role.

Like in other industries, baby formula makers have long tried to make their supply chains as “lean” and efficient as possible. That means they aimed to minimize the amount of time baby formula spent sitting – unprofitably – on warehouse shelves and send the goods from factory to retailer as quickly as possible. The problem is that when there’s a surge in demand or a drop in supply, shortages can result. The leaner the supply chain, the larger the potential disruption.

The WIC program also encourages a lean supply chain because it reimburses just 15% of the wholesale price. The huge volume means the companies can still be profitable, but the lower margins per sale encourage them to keep a very efficient supply chain.

In March 2020, formula sales surged as people stockpiled pretty much everything. But that led sales to drop as parents worked through all that extra formula. That prompted makers to reduce production. And now in 2022, demand jumped again, especially after reports spread of the Similac recall. And with demand soaring and supply down significantly because of the Sturgis plant’s closure, shortages were inevitable.

A woman in a white lab coat and wearing a black mask holds a bottle of frozen breast milk in a big clear bottle
Milk banks are trying to ease the formula shortage by distributing frozen milk donated by lactating mothers. AP Photo/David Zalubowski

Shortage is far from over

Both the Biden administration and companies have announced a variety of measures to end the shortage.

Some companies, such as Reckitt, say they have stepped up production and are running factories seven days a week to get more formula to stores.

The FDA is expected to soon announce the loosening of import rules for baby formula, and some states are allowing WIC recipients to use their rebates to buy formula from companies other than the one on the contract. Abbott has already agreed to honor rebates for competitor products in states where they have WIC contracts.

Abbott and Nestlé are also speeding up shipments from their FDA-approved facilities overseas.

The best way to end the shortage – getting the Sturgis plant online and its formula on retail shelves – will take two months.

Ultimately, preventing this kind of situation from happening again will require changes to government policy and business practices. I believe the government’s de facto monopolies should be opened up to more competition. And formula makers may just have to accept a little less profit from supply chain efficiencies as a cost of doing business – and as a way to ensure families won’t again be faced with the loss of a product so vital to their babies’ survival.

Kevin Ketels does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Tesla’s Situation In Shanghai Is An “Epic Disaster” For Its June Quarter, Wedbush’s Dan Ives Says

Tesla’s Situation In Shanghai Is An "Epic Disaster" For Its June Quarter, Wedbush’s Dan Ives Says

As Elon Musk continues to publicly melt…

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Tesla's Situation In Shanghai Is An "Epic Disaster" For Its June Quarter, Wedbush's Dan Ives Says

As Elon Musk continues to publicly melt down on Twitter about his proposed buyout offer and the left's "dirty tricks" and political attacks that he is expecting, Tesla stock has been plunging.

The automaker's stock came under pressure weeks ago, ostensibly after some investors started to do the math behind Musk's proposed buyout offer of Twitter.

This morning, it's under pressure again thanks to a price target cut by Wedbush's Dan Ives, who has cited Shanghai's lockdowns as his reasoning. 

Ives called the situation in China "an epic disaster" for Tesla's coming June quarter and said he expects to see "modest delivery softness", according to a Bloomberg note out Thursday morning.

Ives also said he is expecting a "slower growth trajectory" in China into the second half of the year and called the headwinds out of Asia "hard to ignore".

He also commented that the ongoing Twitter drama "may be a distraction" for Musk at a time when his attention should be focused on dealing with Tesla's issues. 

Recall, we noted days ago that "no vehicles were sold in Shanghai last month" as a result of the lockdown, according to an auto-seller association in the city. 

We also noted that Tesla's plans to restart Shanghai to its pre-pandemic production levels had been pushed back another week. Citing an internal memo, Reuters wrote just three days ago that Tesla is still planning on just one shift for its plant this week and a daily output of about 1,200 units.

Tesla is aiming for 2,600 units per day by May 23. 

Additionally, it was reported Monday that Tesla would be recalling over 100,000 vehicles in China. 107,293 vehicles in China will be recalled "due to safety risks", according to the China People's Daily

The recall, which relates to a defect in the central touchscreen during fast charging, "involves Model 3 and Model Y vehicles produced in the country between Oct 19, 2021, and April 26, 2022," the report says. 

Tyler Durden Thu, 05/19/2022 - 08:26

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