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The Prospects for Biofuel Development [Rush Transcript; Federal News Service]

Speakers: David J. Rothkopf, President and CEO, Garten Rothkopf, and C. Ford Runge, McKinght University Professor of Minnesota's Department of Applied Economics
Presider: Julia E. Sweig, Director of Latin American Studies, Council on Foreign Relations
June 12, 2007
Council on Foreign Relations


JULIA E. SWEIG:  If everybody could please take their seats, we can get started, please. 

Good morning, thank you for coming this early.  I'm Julia Sweig.  I run the Latin America program here.  And since we're cosponsoring this with the Corporate Program at the Council, you can probably figure out which program decided to convene a meeting this early in the morning. 

But that means that you're here and we're delighted about that, and also especially happy to be able to bring together on an issue that is not well understood at all -- or two issues and the way they interact.  Some of the world's leading experts -- we have David Rothkopf of Garten Rothkopf.  He's also an author of several books and a friend and colleague.  And he has written -- or his company has put out a study on behalf of the IDB on the issue of biofuels globally, but especially in the Western hemisphere. 

Ford Runge is here and I think your coauthor is here.  Professor Senauer, is he here?

C. FORD RUNGE:  He's not here yet.

SWEIG:  Just published an article that has -- he's an expert on food and hunger issues and has just published an article on biofuels and foreign affairs. 

Now, why -- how is it possible to bring Fidel Castro into this discussion?  Well, it got you in the room.  (Laughter.)  And, of course, The Economist published a piece a few weeks ago saying, "Fidel Castro is right," which -- what they were saying was that he was right in his criticism of biofuels as having the potentials to hurt global food security. 

So what I want to do with our two speakers today and with you is try to get at the issues of both energy security and food security and how the rise in demand for biofuels might enhance both or hinder both.  And how the pressures for development and to deal with hunger and food security might be better enhanced in light of the fact that this biofuels demand seems to be a new fact on the ground that we have to contend with. 

So what I'd like to do is -- and we'll focus a little bit on the Western hemisphere in your -- in the comments of our two speakers.  And you'll hear why momentarily. 

So what I'd like to do is, first to ask Ford, if you could very briefly take a second to make the argument about the peril for food and eating and hunger that biofuels may represent and even -- and then I'll ask David to do something similar.  And then we'll see how much nuance there really is because there's a great deal more than I set it up.  And we'll have that discussion. 

So please start, Ford.

RUNGE:  Okay, thank you. 

Well, I guess I'll start with some very simple observations.  As everyone in the room probably appreciates, ethanol and the demand for corn in the United States that the growth in the ethanol industry represents is putting considerable pressure on commodity's prices, not just corn.  It's expected that within the next year or two, Iowa may become a net corn importer; Iowa is the largest producing state in the country and therefore the world. 

Corn prices moved from somewhere between $2.60 to as much as $4.35 over a period of about six months largely in response to the perception that the increased capacity to produce corn-based ethanol in this country would consume on the order of 35 percent of the crop going forward and perhaps as much as half the corn crop within a few years. 

President Bush's State of the Union message indicated a target of 35 billion gallons of renewable fuels by 2017.  The morning after he made his speech, I did a quick calculation and at current production levels that would -- assuming it were met entirely by ethanol -- require 108 percent of the U.S. corn crop -- so no corn for you or me, just corn for ethanol.  No corn for hogs; no for corn for cattle; no corn for poultry, et cetera. 

The result of this is that domestically the commodity's prices in all of those areas that are touched or affected by the corn economy -- and to some extent, in parallel, the soybean economy are facing upward pressure.  And this has implications for inflation and food costs. 

But the primary focus of the work that I did in Foreign Affairs based on research with my colleagues at the University of Minnesota attended to the implications of these price increases in relation to consumers in the rest of the world.  In particular, those billion or so people who still live on a dollar or two a day and who spend the bulk of their household income on food purchases.  The International Food Policy Research Institute has predicted that if current ethanol trends continue we can expect to see increases in the price, not just of corn, but wheat, soybeans, and even unlikely crops such as manioc which is a staple of the poorest of the poor in Latin America and Africa. 

If this kind of raw increase in food prices occurs, it will put the lie to some predictions when be made a few years ago which we discussed in a meeting like this here in the Council -- that if we made the investments necessary which seem modest compared to some of the monies that we're spending in places like Iraq, we could actually end hunger in our lifetime. 

Well, if these trends persist, in relation to commodity's prices, that possibility and promise will be lost.  People will not die in dramatic ways -- they'll become less well-nourished.  Most of them will live in rural subsistence or in urban slums.  They'll become sicker and they will die -- but quietly. 

And so the implication here -- and I'll conclude with this -- is that in order to fill the tank of a 25-gallon SUV with ethanol requires about 450 pounds of corn grain.  That's enough to feed one of these poor people for a year.  So effectively, what we're doing is pursuing a strategy ostensibly based on energy and independence -- and I'll get back to that later -- which may have the effect, as the title of the article suggests, of starving the poor.  And I have to say that these people don't have much of a constituency; they don't have lobbies in Washington of the sort that we see in the energy industry.  And as is often the case, they're likely to be left behind.  But I and the editors of Foreign Affairs thought it was important enough to draw this point to people's attention who are concerned with international affairs and the implications of U.S. policy.

SWEIG:  David, you can react directly or you can take two or three or four minutes to lay out the argument that the conclusions of this report suggest in terms of energy security and that -- how they could be -- it could be reinforced as opposed to undermining food security.

DAVID ROTHKOPF:  Okay.  I guess some of you are here looking for a debate.  And I'm going to disappoint you to some degree -- although my naturally combative New Jersey side will come out sooner or later -- and so there may be some differences. 

But, you know, I agree, corn is a lousy product to use for the production of ethanol.  And I think the whole issue is, therefore, a bit of a paper tiger.  It's a little bit like saying, if we continue to improve our capacity to produce food worldwide, obesity could result.  Yeah, if we, you know, eat too much of it, if we don't allocate the resources properly, if we don't use our heads, it could have a bad outcome.  But the reality is that there are other considerations.  One consideration is that climate changed the reality in the world.  Something needs to be done about it.  Another is that ethanol -- among many, many, many other energy choices -- provides some near-term relief from that, gives countries the ability to reduce greenhouse gas emissions in the near term, reduce dependence on foreign oil in the near term, and do so with proven technologies without modification of their vehicles. 

Having said that, corn is all the things that you said, and all the studies about corn say that it's pushing up prices and that if we use more corn for ethanol it's going to push up more prices.  And so the question is, you know, can ethanol be made from something else, and of course the answer to that is not only can it be but it is being, and it should be.  Brazilians produce ethanol from sugar cane almost eight times as efficiently as we do from corn.  Brazil, which started this program 30 years ago, has saved $50 billion in oil exports, has created a million jobs, has now something in the neighborhood of 29,000 filling stations that'll offer drivers a choice between ethanol and gasoline in whatever combination they want because most of the cars sold in Brazil -- eight out of ten last year -- had a $180 chip in them that allowed drivers to choose whichever combination made the most sense given the prices. 

And I think that that is really the revealing fact at the core of all this.  There are a lot of articles and advertisements -- there's big advertisement in The Washington Post today.  There are a lot of advertisements about this choice, saying -- and some essentially say, "Well, you know, you can't replace gasoline with this."  And the answer is no, you probably can't.  And, you know, you don't want to make this choice between gasoline and corn, and the answer is no, you probably don't.  But instead of soft choices we should recognize what we're really doing is entering an era of dramatically expanded energy choices of many kinds where multiple different alternative technologies will be available to people whether they're drivers, whether they're countries seeking different portfolios of energy resources, or companies.  And that as we enter this era of proliferating energy choices, we're going to have to make the right choices.  We're going to have to turn to things like ethanol or we're going to have to adopt other policies.  In India, it's illegal to make ethanol out of edible plants, and there's great strides being made in making it out of jatropha, a poisonous plant.  Some of the products that are being used to produce biodiesel are likewise not cultivated for food purposes and offer a lot of promise. 

Cellulosic technology is, and we can talk about this.  Is it four years away -- six years away -- eight years away -- 10 years away?  I was talking earlier with Powell, and -- (inaudible) -- in Brazil is talking about five year -- three, four, five years away.  Cellulosic technology will allow you take things like switch grass and kimber (ph) and other products that are not only, you know, efficient but have a even better impact on greenhouse gas emissions, and produce them and use them to produce energy.  And at the same time, they'll let us produce energy from sugar cane much more efficiently -- perhaps 25 or 30 percent more efficiently.  So instead of sugar cane being eight times as efficient as corn in the United States, it may be 10 or 11 or 12 times as efficient as corn in the United States.  Instead of the price where it's competitive with gasoline being $30 or $32 a barrel, it may be $22 barrel, and that's a huge difference.  You know, Brazil started this program with subsidies and number of years ago it got to the point where they don't need the subsidies anymore. 

There are lots of lessons out there in the world about how to do this, and there's also a huge amount of investment going into this field, more in the past year than in any year before, and that investment is going to bring cellulosic more quickly, create choices more quickly.  Now, I think there are a bunch of people that invested in corn ethanol who are going to lose a lot of money, and the reason they're going to lose a lot of money is not because we're having a reasoned discussion here at the Council on Foreign Relations, although we know that such discussions change the world on a regular basis.  (Laughter.)  Instead, it's going to be because of a major breakthrough in global energy policy, which is the Iowa caucuses will become irrelevant with the new schedule of primaries in the United States next year.  And if the Iowa caucuses become irrelevant, then presidential candidates won't have to pander to corn growers in Iowa, and they'll be able to move away from policies that have overpromoted corn. 

And, you know, you even saw where there was a hint of this.  Tom Vilsack, who was running for president and was governor of Iowa, came out and he said, "Let's get rid of this tariff that's keeping out ethanol made from sugar in Brazil."  And he's not running for president anymore but he was from Iowa, and there is something in that -- that the governor of Iowa said, "We got to get rid of this," and I think what'll happen in 2009 when the term of the legislation expires is that it won't be renewed, and Brazilian ethanol and foreign ethanol from the Caribbean and -- well, I mean, the Caribbean has CAFTA -- but I mean other parts of the world will be able to come in without this tariff, and we're not even going to have the discussion about corn anymore.  So yeah, I -- you know, Ford is right -- Fidel is right.  But it's not the right subject.

SWEIG:  So just to get a few more nails into corn's coffin before we go into sort of the kind of policy choices that might unfold after the caucuses are dead and 2009's tariff expires, Ford --

ROTHKOPF:  They're not dead.  They're just irrelevant.

SWEIG:  No, but what I want to ask you is is this quite optimistic scenario on the sort of declining political influence of corn reasonable, and is this -- is the political calendar unfolding in terms of the moving of the primaries enough to neuter corn and decline and just cut its influence on this issue and get it out of the mix?

RUNGE:  No.  Between the brave new world that David has sketched describing what would be a reasonable and rational and evenhanded and level playing field for portfolio of energy alternatives, which is I think where both of us would like to go, and where we stand today stands a very potent set of agribusiness and agricultural lobbies who are far from being encoffined and more likely would require a stake driven through their heart in order to be effectively dispatched.  They will not be. 

I'd like to make a couple of comments.  You know, even if every single acre of corn in the United States was used to produce ethanol it would provide only about 12 percent of the vehicular fuel requirements of the U.S. vehicle fleet.  So first of all, it's not going to generate energy independence except at the margin.  Secondly, between here and the brave new world that we've talked about stand two pieces of policy -- the 51-cent a gallon blenders credit which is paid to ethanol, and the 54-cent a gallon tariff that's applied to competitive Brazilian ethanol and other imports, but primarily Brazilian ethanol. 

Now, David and I completely agree that Brazilian sugar-based ethanol -- cane-based ethanol -- has, I believe, both an absolute and a comparative advantage over corn-based ethanol.  And notwithstanding the fact that the caucuses and the changes in the primary calendar will diminish the inordinate role of Iowa in the presidential campaigns, my own feeling having worked in both the House and the Senate and living in Minnesota is that there's a very substantial group of members of Congress for whom reducing the tariff and the subsidy, both of which I think would make considerable sense in terms of leveling the playing field and creating space for technological alternatives, will occur over their dead bodies. 

So this is going to be very difficult to work our way out of, and in the meantime corn-based ethanol, despite its inferiority, will be driven and the industry will be determined largely by two prices -- the price of corn as an input, and the price of oil as a substitute.  And so if you want to look at the prognosis for that industry, which I gather from the number of financial institutions represented here is of interest, essentially what you want to do is you want to look at the gap between corn prices and oil prices.  And if oil prices come down and corn prices go up simultaneously, the ethanol industry is in big trouble -- at least corn-based ethanol in the United States. 

But as a matter of policy, I can't share David's optimism that we can get to this brave new world unless informed opinion and opinion that does not have a stake in this game, is prepared to take on some of these interests in Washington.  And the Congress, on both sides of the aisle, seems to me to be so timorous in the face of these interests that I think it's unlikely.

I'll conclude by saying, you know, if you interact regularly with the corn growers, and the soy bean growers, as I do, it's hard to imagine that they've spent 25 years nurturing the members of Congress with campaign contributions to support these measures of tariffs and blenders' credits in order to give away this game to grass.  Last time I looked, there was no switchgrass association in Washington that was prepared to support that alternative. 

SWEIG:  I'm going to just ask you then, if I could -- and David, and I'll come back to you in a moment.  But Ford, if that "brave new world" is just that, and this sort of utopian balanced energy portfolio that both of you can conceive of -- one more optimistically, perhaps, than the other -- speak a bit then about the food security dynamic.  That is to say if, in fact, the entrenched nature of the forces keeping the tariff and the subsidy in place are just that entrenched, what are the prospects for feeding people, especially poor people in these rural and urban settings who depend on the kinds of products that are rising in price so dramatically? 

RUNGE:  Well, I'll try to be brief because --  well -- back.  (Laughs) I guess my first answer to your last question was no. 

SWEIG:  What was --

RUNGE:  Well, it was -- I can't remember your last question, but I remember my answer was no -- (laughter) -- and your current question was how, you know, is there any prospect of having, you know, people who live on less than a dollar a day at the table in Washington.  The prospect is bad.  They're -- they're not close to the centers of power and their interests are unlikely to be represented except, you know, in influential places like Foreign Affairs -- I'm saying that quite facetiously in relation to the impact of that journal on the members of Congress. 

So, you know, I'm sorry to say this but I've spent a career attempting to represent concerns related to poor people in poor countries and they're not well represented in our institutions. And it's unfortunate, but I think it's true. 

SWEIG:  Is Washington where these decisions will be made ultimately -- the kinds of policy choices, in poor countries or in wealthy countries but especially in the poor countries, the policy choices that need to be made in order to get to the brave new world and minimize the impact of the big forces -- is it all in Washington?

ROTHKOPF:  Let me go back to this term "brave new world," which has a kind of snide, you know, tone to it.  And I understand why.  I mean, it seems kind of, maybe a little optimistic that things will work out properly although we live in the best moment in the history of mankind and, you know, it's probably worthwhile to remember that progress does tend to move us forward.

Having said that, I don't think it's a brave new world that we're talking about.  I think it's a transforming moment in the way the world deals with energy issues.  I think that the corn ethanol business grew up in a period when corn growers were looking for what to do with excess corn and were looking for other ways to make a profit and were responding to earlier periods of energy demand fluctuation.  And that we have hit the perfect storm in energy, we are now concerned about energy prices because they're high -- for economic reasons.  We are concerned about energy prices because of national security reasons and dependence on regimes that we don't like -- that are constantly taking us to the cleaners and that are costing us in other ways, beyond simply buying energy, such as our -- the costs of what we are doing in the Middle East. 

And finally, the third component is that there is now, as there was not, say, five-ten years ago, a consensus on climate change as an issue of some urgency.  So you have the environment, you have national security, you have economic issues -- they're all driving this.  And at the same time, underneath it, there's technological change.  There's been a dramatic reduction in the cost of wind; dramatic reductions in the cost of solar; terrific increases in efficiencies and advances in new kinds of engine technologies.  There are a host of ways that one can reduce dependence on foreign oil and there are now a host of reasons to do it. 

And that's why I believe that this paradigm shift is taking place.  And that's why I think a lot of the people who are involved in the internet revolution -- whether it's Bill Gates, or Larry Page and Sergey Brin, or Vineet Khosla, you know, or Steve Case -- you know, all these guys saw a paradigm shift in the information world and made a fortune on it.  And they look at this and they see the same kind of conditions taking place.

Now having said all of that, that's why I think that this is not a "brave new world," I think we're in a period of rapid change.  I think, just as in the internet revolution, there's going to be a lot of bad investment and a bunch of mistakes made, just as there's going to be some big winners.  And, you know, again, I just think we need to take a realistic look at it that way.

As far as the question of, is the United States going to make these changes -- of course not.  This is the rest of the world, you know, we're -- we're 4 percent or 5 percent of the population of the world.  We would have less credibility with them right now than we have had at any point in the past, you know, couple of decades -- perhaps since the Second World War. 

You know, I -- we did this study on green energy at the Inter-American  Development Bank.  And I presented it to the board of the Inter-American Development Bank, and one-by-one, people went around saying, "Thank you for your 659-page study.  I look forward to reading it" -- I'm not sure if I believe that -- (laughter) -- but they, you know, some of them read it.  And then, you know, they would say, "Yes, but -- What about food security?  What about the environment?  What about, how does this affect rainforests?  How does this affect water supplies?  How does this affect, you know, land use decisions?" -- and there are answers for those things. 

You know, Brazil increased its capacity -- output last year 15 percent on top of increasing its sugar capacity.  Brazil could triple its export of ethanol with a 1 percent increase in use of land and it would all be pasture land -- not rainforest, not existing agricultural land, land that right now has cattle grazing on it or has nothing on it -- one percent of the available land for that would be used and it would triple its exports, which we believe would allow it to maintain its market share for the next 12-15 years. 

One hundred $200 billion of investment is going to go into Brazil to do this.  Brazilians are going to make these choices -- undoubtedly they'll make some wrong choices along the way too, but -- Africans are making choices; the Chinese just announced yesterday they're looking at food impact and they're going to go and approach this in a different kind of way. 

So yes, are there entrenched lobby groups in Washington spending big money to sort of distort our policy on this?  Heck yeah.  And while we're at it, let's just, you know, throw (brick bread?) at them for the wonderful job they're doing on our trade policy -- but, you know, which is, you know, I mean, agricultural policy is the single biggest impediment to actually getting to the next level in trade liberalization in the world.

But, you know, can we make progress here?  Yes.  Will the decline of the Iowa Caucuses play a role in it?  Yeah, probably.  But look at the energy bill that's in front of the Senate right now and look at the biofuels requirement in that bill.  I think it says 60 percent of the biofuels that they seek to produce are going to be advanced biofuels, which is to say, using cellulosic and that they want to direct money in that direction.  So even in the midst of all this -- and of course we haven't heard of, you know, Grassley and everybody else's charge back against it -- but even in the midst of all of this, there are significant number of people out there whose heads are in the right place. 

And so, not only is the world going to make its own decisions, but I haven't quite given up on the fact that the United States may start to make the right decisions.

SWEIG: This isn't a debate, of course.  I'm going to give you a minute, however, before we open it up to some questions from the audience. 

RUNGE:  Well, let me try to be more positive.  (Laughter.) 

Firstly, I want to say that the report that David produced is superb.  I think it's authoritative and is probably the best single treatment of the biofuels industry that I've seen anywhere. 

ROTHKOPF:  Thank you very much.  It's been nice being here this morning, and --


RUNGE:  Secondly, I'd like to say that what I meant by a brave new world is that the requirements of moving away from the distorted policies that we have currently -- distorting both domestic economic choices and international trade policy -- will require bravery.  And it's in short supply.  So that was my meaning.

Finally, let me say that for 25 years we've justified these subsidies and tariffs on the basis of energy independence.  You may recall President Carter's cardigan sweater and "the moral equivalent of war."  In every year since President Carter made the speech calling for energy independence, U.S. reliance on imported oil has increased.

And because of the price relationship that I mentioned a few minutes ago, the ethanol industry in the United States today, based as it is on an input which has no comparative advantage, is utterly dependent on the maintenance of high oil prices.

So what I've suggested to the corn growers is that they need to make sure that they get on a plane to Saudi Arabia and lobby there, too, so that OPEC will keep oil prices high or they're in very serious trouble.

ROTHKOPF:  And they've promised to do that.

RUNGE:  I'm sure they --

ROTHKOPF:  No, well, the secretary general of OPEC last week said that if the United States and other western nations continue to invest in biofuels, that they're going to stop investing in oil production in order to keep prices high, which is, you know, I mean, the sort of crudest form of bully-boy tactics, but also a stake through the heart through the notion that somehow oil prices are affected by the laws of supply and demand, which they aren't.

RUNGE:  Finally, so, you know, when all is said and done, I would very much like, in a positive way, to move in the direction of a more balanced portfolio.  And, you know, we haven't even discussed the significance of conservation in all of this.  This is not just about "gee whiz" technologies.  There's an enormous amount that we could do in terms of improving the conservation and use of energy.  But there is wind and there are alternatives.

In fact, I would like to invest considerable research and development money into speeding up the development of technologies for cellulosic alternatives and conversion.  But, you know, I'm sorry to say that I think that this patter that you hear from politicians about cellulosic alternatives, which is a phrase that trips off their tongue with increasing frequency, is really just a recognition of nervousness on their part that they may have put themselves in a pretty tight spot as a consequence of what's happening to corn and food prices.

I asked a colleague the other day whether or not we had any switchgrass growing nearby in Minnesota.  He said, "Yeah, there's some out in the western part of the state."  I said, "How about around here?"  "Well," he said, "there's a three-by-three-foot plot up in the greenhouse on top of the hill in the agronomy department.  But as far as I know, that's it."

An ethanol plant manager in Marshall, Minnesota told me that he'd done the numbers and had figured out how much switchgrass they'd need to run his corn-based plant.  And he said, "I'll need a semi-trailer load of switchgrass to pull up to this plant every six minutes, 24 hours a day."

Well, that's probably all the switchgrass in Minnesota, and maybe more.  So if we're going to move in these directions, we're going to have to find reasons to tell people to plant switchgrass and not corn.  And as long as we have the structure of corn subsidies and the structure of ethanol subsidies that drive the demand for corn-based ethanol, that's not going to happen.  So there are some very serious policy issues that require some bravery if we're going to move to the direction of the new world that we'd like to achieve.

SWEIG:  That was the optimistic note.

ROTHKOPF:  Can I just take 20 seconds before you --

SWEIG:  Yes.

ROTHKOPF:  One, I agree with all that, especially the part about our study being so good.  (Laughter.)  Two, you know, you're right about switchgrass and timber and all those other things.  I think a lot of the most interesting work in this area is being done in the area of algae.  And one of the reasons it's interesting is because it uses salt water and not fresh water.  And, of course, there's a large area for growing algae out there in the world.  That's a long way off, but I think that's interesting.

But I do think the most important single point of this entire discussion is the one that you bring up about courage.  We have a political class in the United States that gets extremely timorous whenever they see difficult issues.  And energy is full of difficult issues.

There is no such thing as a sensible energy policy that doesn't have a gas tax in it or a cap in trade mechanism in it to allow people who are interested in the public good to set the level of those prices, not people who are selling oil and interested in preserving the status quo.  That requires courage.  Making the right decisions on this requires courage.

In the Senate bill, there is a 40 percent increase in CAFE standards called for between now and 2020.  That's very modest.  That's 10 miles per gallon over 10 years.  The oil industry and their legislators -- I mean, the auto industry and their legislators are up in arms.  "How can we do this more slowly?"  And what they fail to realize is, if we don't produce efficient engines in the United States, they will be produced someplace else.  And one study I saw said we'll lose 400,000 jobs if we do this slowly.

So, you know, I mean, we've both been involved with presidential candidates in these things over the course of the years.  And you go and you say a gas tax or you say, "Change the CAFE standards," and they go all pale and wobbly.  And that can't go on.  We definitely will not solve these problems if politicians continue to be a lagging indicator to common sense.

SWEIG:  You know, I'm lagging right now in opening it up to the floor, so I'm going to take your questions now.  If you could get my attention, raise your hand, I'll come to you in a moment.

Paulo Sotero -- I neglected to say that this is on the record.  We do have some members of the press here.  I apologize.  This is on the record.

Paulo I'm going to call on first, who's not here as a member of the press any longer, but who directs the Brazil program at the Wilson Center.  Paulo.

QUESTIONER:  Thank you very much, Julia.

I wanted to -- I enjoyed the article, especially the end, when the professor talks about the absolute need for conservation policies.  Nothing will replace that.  No amount of sugar -- no amount of ethanol from sugar cane that Brazil can produce will replace a decent, reasonable, rational policy of conservation.

But I was curious, because the moment I read the piece, in particular when I read the title of this conference, this discussion, I think that Castro is absolutely wrong.  And actually, ironically, Cuba is one of the countries that, if and when it comes back into producing efficiently sugar cane, maybe with the help of Brazil, it can actually produce ethanol from sugar cane for itself, for the U.S., and produce food on the side.

As you know -- and you mentioned the article -- (inaudible) -- that while Brazil is precisely the country that, as we were building our ethanol sugar cane-based industry, we also became the second-largest producer of food and the second-largest exporter of food, and we could be even more efficient than that if we solved the other problems of our economy.  We may still starve some good people in Brazil, but for reasons unrelated to food prices or food availability.

And that's the reason I wanted to ask you why, knowing all that, as you suggested you obviously know, why didn't you include more of the Brazilian experience in this?  Is it because you didn't want it to tackle what David mentioned in terms of the trade dimension of this?  For instance, if the United States and Europe would adopt rational sugar policies, you could actually produce a lot of ethanol through Florida and Alabama and Hawaii.  Again, you have the good stuff to produce ethanol.

I'm curious about this, because I think your argument would have been more complete if you included more experience of a country that can prove that, yes, you can deal with -- you can produce ethanol efficiently, you can help the environment, and it doesn't need to put pressure on food prices.  You can do both.

RUNGE:  Well -- should I respond?

SWEIG:  Yes.

RUNGE:  I agree with what you say.  We actually did have a more extensive discussion of trade policy and Brazil but it was, you know, left on the cutting room floor as often happens when, you know, articles are edited.  And I agree with the substance of your remarks concerning the importance of Brazil as an alternative. 

Let me just make a couple of remarks about trade and sugar.  We've already discussed the fact that there is 54-cent-a-gallon tariff on imported ethanol for a reason.  And the reason is, of course not the sugar industry directly, however, the arrangements that we have in relation to our sugar industry which involve a guaranteed price which is supported by tariff rate quotas so that foreign sugar -- in addition to foreign ethanol -- can't enter the domestic market is terribly important to the corn industry because the supported price of sugar allows high fructose corn syrup to be competitive.  And high fructose corn syrup is in turn associated with the wet milling process that is the preponderant basis for producing ethanol. 

Collin Peterson, chairman of the House Agricultural Committee from Minnesota happens to represent a district in Northwest Minnesota that has plenty of sugar production -- beet sugar -- and plenty of corn.  And he's not interested in having the sugar program or the corn subsidy or the tariff on Brazilian ethanol go anywhere because the interlocking relationship between sugar and corn in more important than the opportunity to produce sugar-based ethanol domestically in the United States. 

SWEIG:  Yes, sir?

QUESTIONER:  Good morning.  Steven Kass, Carter Ledyard and Millburn. 

I'm -- well, hoping, waiting for the rational day of energy policy when environmentalists asses and I assume the impacts of those new programs.  I wonder if there isn't a silver lining buried in the corn problem that you talked about, Ford. 

One of the problems in the developing world, of course, is that food subsidies, agricultural subsidies from Europe and the U.S. and who knows where have made it so difficult for domestic producers in many developing countries to compete with the foreign agricultural supplies -- have put a lot of them out of business, has accelerated urban migration, along with other things such as climate change.  But I'm wondering whether in fact short-term increasing costs for U.S. produced food might not provide a little space or the small scale agricultural producers in the developing world, ultimately, actually helping those countries stabilize in certain ways.

ROTHKOPF:  My take of this -- and this is Ford's area of specialty, so I'm not going to really speak to the point for too long -- is that these are global commodity markets.  And so as prices go up, they affect prices everywhere.  And so I don't know that it's going to give anybody any breathing room.  I think that there are a number of countries worldwide that are very concerned about this for just that reason. 

Just want to say parenthetically in the last comment, you know, we talked about whether Castro was right here.  Castro is reading talking points prepared by Hugo Chavez.  And Hugo Chavez has a horse in this race.  You know, he said the same things over the weeks before Castro said this -- I mean, almost identical.  And when I was in the IDB meeting, the Venezuela representative read the same talking points.  These are talking points prepared by the leading oil producer in the Western hemisphere -- surprise. 

Now, there is, you know, there's a kernel of truth in there.  You know, I mean there is something -- we talked --

SWEIG:  A corn kernel.

ROTHKOPF:  A corn kernel -- elegantly put.  And -- but I do think that we need to see that there are other special interest groups at work here behind some of these arguments.

RUNGE:  Well --

SWEIG:  Answer very briefly please and then --

RUNGE:  Julia, I appreciate how attractive it is to title a session like this, "Is Castro Right," to the point of view of getting people to come.  But, you know, when was the last time anybody really gave a damn about what Castro thought about anything anyway.  I mean, I just -- I don't think it's really very interesting to ask whether he's right or wrong.  He's probably -- he might have been right for the wrong reasons as Saul Wollensky (sp) used to say.  Or he might have been wrong for the right reasons.  I don't know. 

SWEIG:  Well, let's not focus on Castro.  That wasn't the point at all of this.  It wasn't the --

Yes, sir?

QUESTIONER:  John Mbiti from UBS. 

I'd like to follow up on the issue of the consequences of price rises of corn in the United States and in the developing world.  In the case of the United States, I think the best analogy would be, as the first speaker said, to look to the case of Brazil where despite over 30 years investment and development in sugar cane as an alternative fuel for ethanol, basis for ethanol, there hasn't been a cataclysmic rise in prices to the point where the poor aren't able to afford essential commodities.  And so even though the prices may have risen in this country, I would characterize this as a short-term (asset bubble ?).  But in the long term I don't think this is going to cause the sort of consequences people are talking about here. 

Now, in the case of the developing world, first of all, most poor countries are actually either they depend a lot on subsistence farming so they're not really net importers or they're actually net exporters of agricultural commodities.  So if the price rises for corn, wouldn't that actually benefit as opposed to obviously adversely impact poor countries?

RUNGE:  Well, the terms of trade affects of the increase in these commodity prices are somewhat complex.  I think also one has to understand that even if a country is a net exporter of a particular commodity, it's still the case that many subsistence producers in those countries are net consumers of food commodities.  Sugar is not actually a food commodity and the Brazilian industry has been based on sugar probably -- I'm not sure if it was by design but probably it was -- and it doesn't compete directly with food crops.  Concomitant with the growth of the ethanol industry based on sugar in Brazil have been major increases and tremendous success in increasing yields and productivity in oil feeds and corn.  And this is the primary explanation, it seems to me, for the reason that Brazil's people have on balance prospered from these duel developments. 

Now, you know, as we continue to talk about alternative and whether or not these distortions are going to be permanent or transient, it seems to me that it's important to look at this year.  This year, when planting intentions were announced as a result of the usual spring survey by USDA, the result indicated that the U.S. would plant more corn than in any year since 1944 -- an increase of 12 million acres, about 15 percent.  This supply response is exactly what you would expect to moderate the impact on prices of corn and other commodities.  But if one thought that it was so simple, keep in mind of the 12 million acres that are going into corn this year, about nine are coming out of soybeans.  The remainder are coming out of conservation and reserve lands in the main.  What that means -- and we haven't touched on the environmental aspects of this -- is that those lands that had previously been rotated from soybeans to corn to take advantage of soybeans' legumes properties as a nitrogen-fixing crop, will require in continuous corn, major applications of nitrogen fertilizer.

Furthermore, the conservation reserve acres that are coming in were put in the conservation reserve for a reason, which is that they were vulnerable to a variety of erosion and other damages.  The primary cause of the hypoxic zone in the Gulf of Mexico is excessive nitrogen loadings occurring on corn above the confluence of the Ohio and Mississippi Rivers.  So what we have in train here are adjustments that are occurring, but are having other impacts.  In southern Minnesota, Green Giant can't find people to grow green beans for its canneries because everybody is putting every acre that they can find into corn, in response to this -- this trend.  So even if there is a supply response, and I think there will be -- I think there'll be a tremendous amount of corn grown all around the world this year -- I'm not convinced that that's a sufficient basis for saying that these distortions will not reverberate through the food system.

SWEIG:  Pete, did you want to --

QUESTIONER:  Pete Peterson.  If I may for a moment take advantage of my chairman's privileges, I've been coming to this place for longer than I can imagine, and I'd like to say these are two of the most thoughtful, articulate, balanced, civilized discussions I've heard, and I congratulate them both. 

Setting aside the important issues that you raised about the effect on prices and, you know, hunger in the world and domestic politics and so forth, let me turn to another kind of fundamental question to me.  Presumably the reason they're advocating ethanol from corn is to increase the net energy supply.  But I read something in The Washington Post a month or two ago that suggested that by the time you consider the energy it takes to produce the corn and all of those related energy consumption issues, the net increase in energy is really remarkably small.  Is -- is that correct, or not?

ROTHKOPF:  With corn it is correct, but with sugar cane, it's not. 

QUESTIONER:  No, with corn, I mean.

ROTHKOPF:  Yeah.  No, with corn, it's correct.  The net -- the net energy benefit from corn is quite low, and it's another reason why it's just a mistaken direction to go in --You made a comment earlier about whether Brazil had gone in the direction that it had by design, and I thought it was another one of these well-turned phrases, because one of the things that Brazil has started to do is actually design the -- the plant product.  And they're actually producing energy corn -- I mean energy cane -- which is much higher in energy content.  So it's not just, you know, the same sugar that, you know, is used as a food product.  It's a special sugar, and I think genetic engineering plants to maximize the energy content in those plants, combined with cellulosic technology that allows you to get the maximum amount of energy out, is going to actually produce the kind of higher outputs that make this worthwhile.  But it's not going to happen with corn.


SWEIG:  Yes, sir.

QUESTIONER:  My name is Fred Broda, and my question relates to other forms of energy.  It's sort of a follow-up, and perhaps it's not appropriate for the table here this morning, but another discussion.  It has to do with hydrogen in water and what benefits are there to developing those alternative forms for energy in our country? 

SWEIG:  Which of you wants to go with that?

ROTHKOPF:  Well, I think we're going to say the same thing, but if I'm wrong, Ford, you know, correct me. 

You know, talk about a brave new world --

RUNGE:  I really got to you, didn't I? 

ROTHKOPF:  Yeah.  (Laughter.)  I mean, I'm going to immediately go get some Aldous Huxley, as soon as I get out of here.

RUNGE:  Well -- but --

ROTHKOPF:  It's a poetic reference.

(Cross talk.)

ROTHKOPF:  Oh, you -- you were talking even back to Shakespeare and "The Tempest."  (Laughter.)  But in any event, hydrogen may in fact prove to be a wonderful option.  Certainly it's the most abundant element that we've got that we can, you know, play around with here.  But it's a long way off, and I think you're going to be dealing with other things in the near term -- plug-in hybrids and other kinds of things that are going to produce real -- very, very dramatic, real results very soon.

RUNGE:  Could -- could I just say, on the energy balance front --

SWEIG:  Very briefly, because I want to bring one more person in.

RUNGE:  Okay.  Well, there are considerable energy advantages, not just to sugar as an alternative, but to cellulosic alternatives.  I mean, if in fact we could do the R&D to get the costs of cellulosic conversion down from about twice that of corn today, the energy advantage of using those inputs, as my colleague David Tilman at the University of Minnesota has shown, would be very considerable.  But once again, you see, the question is can you move politically off of corn and soybeans and towards switchgrass and other cellulosic inputs, given the current structure of policy.

SWEIG:  Yes.

QUESTIONER:  Lisa -- (inaudible). I'm a reporter with Energy Intelligence

I was wondering if you could talk about the production of ethanol in Central American countries contributing -- and other Latin American countries that are net importers of energy.  Is that contributing to anti-poverty and energy security in those countries?

ROTHKOPF:  What do you mean, contributing to anti-poverty?

QUESTIONER:  Well, I mean, the possibility for -- for those countries being able to export, and therefore -- because a lot of their revenue is going to importing oil, and so the possibility of those countries --

ROTHKOPF:  Well, there are -- there are a number of countries in Central America, and there are some elsewhere in South America, that have real possibilities when it comes to using sugar cane to produce energy.  In South America, both Peru and Colombia -- you'll forgive me, Paola -- actually produce sugar cane a little more efficiently than Brazil, per acre.  So, you know, there is some interest there and there are some real possibilities.  And in places like Guatemala and Honduras and some other countries that have -- Costa Rica -- that have some history of sugar growing and the ability to export -- you know, I don't know whether Cuba is a good possibility or a bad possibility.  The Dominican Republic is certainly a place that some people have been looking -- there are some real opportunities.  And I hate to sort of do this cop-out, but if you go to our study, we look at 50 countries in the world and we look at the capability to produce in each of those countries, and the impact.  And there are certain -- you know, I mean, I wouldn't rush into Haiti to do this right now, because Haiti's got a whole host of other problems.  But there are certain countries, including the ones that I mentioned, that do have real possibilities.  And if you look at it and you look at the productivity -- it can create jobs, it can produce export dollars, it can help reduce dependency on foreign oil.  It can do the same things for them that it does for us.

The interesting thing is, you know, we looked at 50 countries; 40 of them had put into place biofuels promotion efforts, 27 had put into place mandates, most of this in the past few years.  So there is this kind of massive effort in governments around the world to change the regulatory environment, and I think that's another factor that's actually going to drive -- drive us towards this kind of innovation.

But here in this hemisphere, which produces 80 percent of the world's ethanol, primarily between the United States and Brazil, where Brazil exports 50 percent of the world's ethanol, dramatically more than any country.  There are only seven countries that have done any kind of energy plan, out of the 22 that we looked at closely.  So there's a lot of possibility, but people haven't put pencil to paper to start drawing the roadmap yet.  So it's -- it's early days.

SWEIG:  Well, on the note of drawing the roadmap, one element that we might think of that would require some bravery and courage would be having a national public transportation system that would conserve energy, consume less of it and potentially, sort of long term, help on the -- on the (cost ?) inefficiency front. 

You two have been enormously thoughtful, brave and courageous and literary.  I think this is a transformative moment, and I am an optimist, so I'm going to stick on that note that I think that the, you know, often foreign policy and domestic politics reinforce one another very negatively, but we might be at fork in the road on that -- (word inaudible) -- at least on this issue.  I hope so, and I want to thank all of you for coming and thank our speakers, and have a wonderful day.

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