The U.S. ethanol mandate in the early aughts reshaped American agriculture by tying corn production to fuel production; this saw corn demand double, with roughly half the corn crop now tied to biofuels. So, the case for diverting large amounts of U.S. corn into fuel production is now becoming less clear.
U.S. energy has become independent following the shale revolution. The environmental benefit has been refuted and moving forward, food security will be far more important than biofuels. Allocating large amounts of U.S. corn for fuel production becomes economically and politically difficult when it’s needed (and more profitable) to use for human consumption.
Hey all. Peter Zeihan here, coming to you from a snowy Colorado in May. Because that’s what happens in the mountains. Today we’re taking a question from the Patreon crowd, specifically how I see US agriculture evolving over the next several years, specifically in light of the balance among corn and soy and biofuels, with, of course, ethanol being at the top of the list.
Real quick history lesson for those of you not familiar with the space, the United States has used gasoline and diesel for pretty much everything for transport for the entire industrial age. Until we got to the early 2000, when we got a fuel mandate from the federal government. That said, a certain percentage of most gasoline that you pump has to have a certain percentage of ethanol.
In most states, it’s in the 10 to 15% range. Now, lots of people have bitched and moan about this for multiple reasons, but basically it took the single largest commodity class that the United States had fuel and cross-referenced it with. The second largest of the United States has, which is row crops, specifically corn. So if you go back to the 80s, a few states in the Midwest, Iowa, of course, did have their own state ethanol mandates.
But now we had a national one. And from roughly 2004 until today, The total need for corn grown in the United States is roughly doubled, because about half of it is now used for biofuels. Now, that’s not that’s a bit of a blanket statement. The leftover, once you extract the bit that can be turned into ethanol can still be used for animal feed.
But what it has done is it’s radically changed the agricultural situation of the world’s largest agricultural producer, taking a large chunk of land away from producing stuff for food to instead it being available for fuel that is directly responsible for a lot of the increases around the world. We saw in food prices in the late 2000, because it took ten years for American farmers to produce the volume of crop required, as well as for the United States to build up the infrastructure required.
Because you don’t take corn to an oil refinery, you have your own ethanol refinery, and then you blend that ethanol in with the fuels at another location. Anyway, in the world that we’re moving into, where agricultural supply chains break down on a global basis, we’re going to be seeing a world that isn’t able to feed itself. And with six or what are we, 7.5 billion people, whatever the number happens to be billions of people.
And if you have half of the corn crop in the United States going towards fuel instead of human consumption, you can see how this is going to be a problem. It’s just that there aren’t very many countries in the world that have easy access to the inputs, whether it’s the manufactured product, the financial products, or the fertilizer products that are necessary to grow food at scale.
The United States is by far the largest of them. And if you look at some of the other major producers around the world, most notably China and Brazil, they can’t be agricultural producers without globalization. They import too many of the things that allow agriculture to work. So in a post globalized scenario, if we’re lucky, we’ll only lose a billion people.
Which brings us back to ethanol. Ethanol is the mandate, because you had a lot of folks in the farm states that were looking for a way to bolster rural incomes in general, and farmers in particular, and the mandate for ethanol and a new one that seems to be being gestating for soy diesel follows similar patterns. But if you remove this, call it conservatively, one third of global food production, then all of a sudden food prices are going to skyrocket.
And the argument that the United States government should subsidize agriculture to make biofuels kind of falls away. You see, when this all started, the ethanol mandate had a three piece alliance. The farm states obvious environmentalists who thought since it was grown from the ground, it would have a lower carbon footprint. And national security folks who saw this as a way to break our dependance on the Middle East.
Well, 2026 is not 2000, because now the United States has had the shale revolution. And it’s not just the world’s largest producer of crude oil, and the world’s largest producer of gasoline were the world’s largest exporter of refined product in general. So the national security folks have just kind of faded from this conversation. The environmentalist, who sometimes are a little squeaky with their math, did the math and realize that at best it’s a wash, because the process of growing that amount of corn and moving that amount of corn is actually generating just as much CO2 as what you have to do for gasoline.
So they went away. So now it’s just the agriculture folks. And if it’s just the agricultural folks, it’s also ultimately going to be about farm income. And if you move into a world where a third of food production falls offline, all of a sudden farmers will be earning less growing food corn for the ethanol mandate than they would growing food for human consumption.
So regardless of where you are on this equation and what argument you may have had in the past, the macroeconomic situation that led us to doing ethanol at scale is fading pretty quickly. One of the many, many, many outcomes of the Iran wars. We realize just how vulnerable global supply chains were in everything from semiconductors to tractors, because one part of the world produces a lot of the base materials that are used somewhere else.
That is something that’s going to be reverberating for the rest of the year, and it is something that is really just the tip of the iceberg compared to what is coming. Ethanol was fine in a highly globalized world where there were lots of options. Pretty soon that’s not where we’re going to be.
