How US Government Policies Conspire to Keep Food Prices High and Rising (and Hurt American Families in the Process)

Recent, widespread reports that US inflation remains tame in the face of ever-loose monetary policy have been met with skepticism from certain folks because the most common metric - "core CPI" - omits rising food and fuel prices.  One such critique that recently caught my eye came from Ben Domenech in his must-read newsletter, The Transom, who noted among other things that "according to BLS figures, over the past five years, the average prices for all goods are 7.7% higher; the average price of bread is 10.4% higher; and the average price of meat/poultry/fish/eggs is 16.2% higher."

In a subsequent email, Domenech sent along the following chart, which really hits his point home:

That's a pretty stark picture, and it got me thinking about what's causing the recent and alarming spike in US food prices - a problem that, of course, disproportionately hurts poor American families and stands in stark contrast to fantastic price declines for many US consumer goods (as documented repeatedly by AEI's Mark Perry).

As it turns out, there are several government policies that are conspiring to keep US food prices high and rising and thereby line the pockets of certain special interests at US consumers' expense.  I'd be remiss not to lead off with the fact that many archaic US trade barriers on certain foods thwart foreign competition and the lower prices that it facilitates. According to the US International Trade Commission's latest report on "The Economic Effects of Significant U.S. Import Restraints," these artificial barriers to free trade raise US prices of certain foods to levels that are well above global averages.  I railed against these barriers back in 2009 using the previous version of the ITC's report, and that critique unfortunately remains valid (although certain numbers obviously have changed):

The table below is from the 2009 ITC report (click to enlarge).  It shows the products that face the highest import and export tariffs in the United States, as well as the US-world price difference caused by those import barriers. 

 

As you can see, some of the highest trade barriers in the United States are on things that American families use everyday - food (cheese, butter, milk, sugar, tuna, etc.), clothing (including thread, fabric and textiles) and shoes.  The taxes on these necessities range from a few percent to almost 48 percent, and these trade barriers result in US prices that are up to 57 percent higher than prices for the same goods in other markets.  So, for example, US trade policies force American families to pay $1.57 for a stick of butter, while Canadian families pay only a dollar for the exact same thing.  Nothing like a 57% butter tax to help the Joneses really tough-out the recession, huh?  Awful.

Thus, archaic US trade barriers designed to protect certain food producers - most notably sugar and dairy farmers - from international competition inflate food prices and force American consumers to pay through the nose.  Like I said back in 2009, awful.

As bad as this protectionism is, however, it only helps to explain why US food prices are artificially high versus world market prices; it doesn't explain the dramatic spike in domestic food prices over the last several years (the protectionism isn't new).  Some of this increase is most definitely due to market forces like increasing global demand for food and recent weather problems, but there are also several non-market (read: government) factors at work here.  Perhaps the biggest one is the United States' ridiculous support for ethanol in the form of direct subsidies and the Renewable Fuel Standard which requires refiners to add steadily increasing amounts of ethanol to gasoline.  Reporting on a new study by FarmEcon LLC, the Heartland Institute summarized how these policies affect food prices:

For more than half a century, from 1950 through 2005, U.S. consumers benefited from gradually declining food prices. Since 2006, however, prices have sharply risen, with a typical family of four now paying $2,055 more in food bills than would be the case if costs had kept to the 1950-2005 trend line. 

Rapidly rising corn prices, caused primarily by ethanol subsidies and mandates, are the most important factor in rising food prices. 

“Fuel ethanol production capacity, based almost entirely on corn as a feedstock, exploded from 2006 to 2009,” the study reported. “Demand for corn to supply the new plants also exploded. Corn production did not keep up with the higher demand, and corn prices have more than tripled since the mandates came into effect.” 

“Corn is just one of many basic farm inputs used to produce the U.S. food supply. However, with increases in biofuel demand and declining corn production, corn prices have increased sharply. In turn prices of other major crops have also gone up significantly. This ranges from major field crops like soybeans and wheat, to horticultural crops such as potatoes, strawberries, and processing vegetable crops. Higher prices for other crops were necessary in order for those crops to compete with corn for land.… These higher commodity prices mean higher incomes for crop producing farmers, but also higher food production costs, higher consumer food prices, and increased food costs for family budgets,” the study explained....

Other studies - including one by the non-partisan Congressional Budget Office - come to similar, depressing conclusions: US ethanol policy forces food prices higher, benefiting a small cabal of farmers and domestic ethanol producers at the expense of American families and the economy more broadly.  Reason's Peter Suderman adds (in case you weren't offended enough already):

Last summer, three farm economists at Purdue University estimated that even if we just partially relaxed the renewables standard, corn prices could drop by as much as 20 percent. (That could also help ease the impact of rising gas prices, another factor that Karlgaard names as hurting Walmart in his oped, by increasing fuel economy.) 

It’s not just American consumers who would benefit. It would also help stop the rise of food prices worldwide, which harms poor and developing nations. The global impact is big enough that last summer, the World Bank suggested that an immediate easing of the renewables mandate could prevent a world food crisis.

But if you think that all these reports on ethanol's serious problems would somehow lead to reforms, Tim Carney helpfully instructs us today to think again:

The Iowa Renewable Fuels Association flew into D.C. this month to defend the mandate. The National Biodiesel Board has retained a new lobbyist this month - former Republican Congressman Kenny Hulshof. Poet, the country's largest ethanol producer, hired a new top lobbyist, former House Science Committee staffer Rob Walther. 

Ethanol's best asset may not be on K Street, but in the EPA: new administrator Gina McCarthy. McCarthy, confirmed by the Senate last week, is a consistent ethanol-industry defender. 

Late last year, for instance, governors from both parties and five states petitioned the EPA to waive the ethanol mandate. The governors weren't petitioning on behalf of drivers or Big Oil, but on behalf of ranchers. Feed prices were going sky-high thanks to drought, and the ethanol mandate diverts corn from cattle feed to gas stations.... 

McCarthy, then assistant administrator for EPA's Office of Air and Radiation, denied the request.

Industry, lobbyists and bureaucrats preventing much-needed reform of harmful regulations?  Shocking, I know.

Unfortunately, US ethanol policy isn't the only thing causing the recent run-up in food prices.  It turns out that a combination of easy money and federal subsidies (particularly crop insurance) has facilitated intense speculation by both farmers and investment firms in the US farmland market, with quite predictable results:

Because higher prices for crops means farmers could make more on their land, many are using their growing profits to buy more land. Investment firms have caught on -- they're buying too. 

The Kansas City Federal Reserve said irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. And despite the drought in Iowa last year, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska have also doubled during the same period. 

Analysts and economists have quietly warned of a bubble in farmland since 2011. The latest comes this week -- a group of bankers advising the Federal Reserve warned prices aren't justified and have entered bubble territory, according to records obtained by Bloomberg of meetings of the Federal Advisory Council. As investors shy away from bond markets and search for bigger returns, members say they've opted for farmland. They blame the central bank's super-low interest rate policies. 

"Agricultural land prices are veering further from what makes sense," according to minutes of the Feb. 8 gathering of the Federal Advisory Council. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."

More on the farmland bubble and its causes is here and here.  Further encouraging these investments is the fact that they receive artificial support from federal subsidies, especially the types of crop insurance that both the House and Senate just doubled-down on in the latest Farm Bill.  So investors use dirt-cheap credit to buy land whose ever-increasing value is protected by taxpayer-subsidized insurance.  Perfect.

Also, as we've already discussed, pushing up crop prices and encouraging more farmland speculation is US ethanol policy, creating a rather vicious government-driven cycle: ethanol subsidies and mandates lead to higher crop prices, which combine with super-low interest rates and federal subsidies to encourage farmland speculation by both farmers and Wall Street investment firms, which leads to even higher food prices, thereby encouraging even more speculation.

Rinse, repeat.

Caught in the crossfire, of course, are struggling American families who don't have the luxury of being part of the ethanol con or having the spare (low-interest) cash and connections needed to invest in taxpayer-subsidized farmland.  For them, it's all downside, driven (in part) by really bad government policies.

So maybe overall inflation is in check, but that doesn't mean that federal monetary and other policies aren't causing pretty serious problems for a large portion of the citizenry, particularly those on the lower-end of the economic spectrum.  Such problems are definitely out there; you just have to look beyond the headlines.

Documenting the Real - and Personal - Harms Imposed by the Obama Administration's Trade Remedies Policies

Over the last few days, I've tried to document the myriad problems surrounding current Obama administration policies related to trade remedies (i.e., anti-dumping, countervailing duty and safeguards) actions against Chinese imports.  I first explained (in admittedly excruciating detail) how the administration's steadfast support, in the face of numerous adverse legal rulings, for imposing CVDs on imports from "non-market economies" (NMEs) like China and Vietnam was undermining US-China trade relations, injecting uncertainty into the US economy, and creating tons of needless litigation in US courts and at the WTO.  I then criticized President Obama's rather, ahem, audacious claims in the 2012 State of the Union Address that his administration's "Section 421" safeguards tariffs on Chinese passenger vehicle and light-truck tires created lots of American jobs and will therefore serve as the poster child for the President's new trade "enforcement" team.

These blog posts follow years of documenting the problems with US trade laws and the immense-yet-mostly-unseen costs that US trade remedies actions - including the Section 421 tariffs and unrelated countervailing duties on Chinese off-road tires - impose on American businesses (e.g., importers, retailers and downstream manufacturers) that consume, import, market or sell Chinese and other imported goods subject to all of those US duties.  Most of these discussions, however, were been based on public statistics and published news reports, rather than firsthand accounts (mainly because most US business owners are unwilling or unable to comment on the record about such things).

Then last night I received an unsolicited email from Mr. Robert Sherkin, currently President and CEO of Dynamic Tire Corp. and a founder of the now-bankrupt GPX International Tire Corp (the named Plaintiff in the big US court case on the CVD/NME issue).  [Note: I don't represent Mr. Sherkin in any capacity.]  He kindly praised my analysis of the troublesome US trade remedies cases against Chinese tires, and then in a subsequent email explained just how these particular trade actions - which have been repeatedly ruled illegal by US courts and the WTO, yet continue to be championed by the Obama administration - destroyed his company (via the aforementioned bankruptcy), eliminated hundreds of US jobs, and personally cost him millions of dollars.  I asked Mr. Sherkin if I could post his email here, and he agreed.  It is copied below, verbatim (with my clarifications in brackets):

From: Robert Sherkin
Date: Thu, 2 Feb 2012
To: Scott Lincicome
Subject: RE: your post 

[Regarding the AD/CVD investigation of off-the-road (OTR) tires and subsequent CVD/NME litigation in US courts...]

We spent millions fighting this battle for 4 years only to lose the company. The process was Orwellian. You go in thinking that truth would prevail and vindication would be the end result. Boy were we wrong... even now with a US Court telling the government 3 times that they are wrong … they still refuse to accept it.

You can’t possibly calculate both AD and CVD in a non-market economy.  The “surrogate cost” inclusion deals with the CVD aspect!  It is DOUBLE COUNTING.

Has the USA really become that weak that they need to have 6 outs per inning where the other side has 3?  Doesn’t anyone want to do the math or are even the “smart guys” on the Hill only capable of focusing on 20 second sound bites from the talking heads.

We spent over $30 Million on a facility in China, employed over 200 people in North America.

Titan Tire launched an AD claim which was subsequently commandeered by Bridgestone, who by the way was brilliant!  Using their aging 40 year old factory in Bloomington Illinois that they haven’t invested much in over the years, they have effectively blocked China from access to their OTR market in USA ($300+ Million per year) which they fill mostly from their factories in Japan... how smart is that!

Titan on the other hand claimed they couldn’t compete in USA but purchased more USA assets with the goal of attaining 50% of their revenue on an export basis... how can they compete with China outside of USA if they need AD/CVD protection inside USA?  Ridiculous argument but the DOC and ITC lap it up.

[Regarding the Section 421 safeguards duties on fairly-traded Chinese consumer tires...] 

The latest one we are currently suffering with is the 421 ruling on consumer tires... what I call Obama’s $6 Billion Tax on the US consumer... not one new job was created as a result despite the state of the union lie!  This 421 ruling will have had the effect of increasing the cost of automotive tires to the US consumer by not less than $6 Billion over the 3 years [that it will be imposed]… and imports during the last 2 ½ years have not reduced, they only shifted from China to Taiwan, Malaysia, Thailand, Korea and others.  The USW (not one industry participant) claimed that the 421 “relief” was needed to address market disruption caused by the surge of tires imported from China.

So the US consumer pays the price for the USW to the thump their chest, to the tune of $6 Billion.  Priceless!  Something tells me that there are a lot of better ways to spend this amount of funds!

Sorry for my rant….. I feel a little better now! --- getting kicked in the teeth by the US Government for over $20MM personally gets one a little agitated sometimes!

I don't know about you, but there seem to be plenty of reasons for Mr. Sherkin to get "a little agitated" about (and no reason for him to apologize for) how he, his company and its employees were treated by the Obama administration and its strong commitment to maintaining the problematic status quo on US trade regulations.

The loss of a small business, 200 jobs and $20 million can certainly cause a guy to get a little ranty.

In a great new video, Senator Jim DeMint (R-SC) explains how US regulations are destroying American entrepreneurs' ability to compete and succeed in the global economy.  As I (and others) have frequently noted, US trade remedies laws - and the litigation arising therefrom - are precisely the types regulations that can, if poorly crafted or administered, strangle American businesses - particularly those that consume or otherwise rely on imports.  Unfortunately, many politicians - even supposed champions of the free market - seem to forget that US "unfair trade" regulations can impose very real costs on many American businesses (US tariffs are paid by Americans, afterall) and often on very "unfair" terms.  Maybe Mr. Sherkin's story will help them remember (or discover) that fact.

And if more of this is the future of the Obama administration's China trade policy, then heaven help us.

Currency Hawks' Dream - and Consumers' Nightmare - May Be Coming True

As I've, frequently discussed on this blog, politicians and pundits who repeatedly demand that China dramatically appreciate its currency, or that the United States impose tariffs on Chinese imports until they do, are really advocating higher prices for the many American families and businesses that purchase such goods.  These currency hawks' dreams haven't come true (the nominal USD-RMB exchange rate has only gone up about seven percent over the last 18 months), other factors - such as increased labor costs and inflation (a partial result of China's currency policies, of course) - have caused Chinese import prices to rise rapidly over the last year or so.  The WSJ explains the expected, and painful, results (emphasis mine):

After decades as America's go-to destination for low-cost consumer goods, China is undergoing a profound shift. Rapid economic development and a smaller supply of young migrant workers are pushing up labor costs. Tack on rising raw-materials prices, driven largely by Chinese demand, and a strengthening currency, and China-made goods aren't the bargains they used to be.

In the past year, labor costs have risen 15% to 20% at Michaels Stores Inc.'s Chinese suppliers, says John Menzer, chief executive of the arts-and-crafts retailer. He says his company has spent much of the year seeking ways to partly offset those increases, such as by grouping goods from different suppliers into a single container to cut shipping costs.

Still, Michaels has had to raise prices this year on some items, including artificial Christmas trees. And Mr. Menzer expects its battles with rising Chinese costs to continue. "Our suppliers are very nervous about labor costs," he says. "We'll have the same pressures next year."

Last month's prices for Chinese imports were up 3.9% from a year earlier, the Labor Department said Wednesday, matching October's gain, the largest year-to-year monthly rise since 2008.

Wednesday's report showed that prices were up sharply for many kinds of goods for which China is the dominant supplier.

China accounts for about 80% of U.S. shoe imports; imported-footwear prices in November were up 6.1% from a year earlier. It accounts for about 60% of furniture imports; imported-furniture prices also were up 6.1%. About 80% of U.S. luggage imports come from China; prices in the category that includes luggage and similar goods rose 8.3% in November.

Those higher costs are one reason that U.S consumer prices have risen this year, despite the weak economy. Economists expect Friday's inflation report from the Labor Department to show that, excluding the volatile food and energy categories, November consumer prices were up 2.1% from a year earlier, on par with October's rise....

Rising wages in China aren't new, says Bank of America-Merrill Lynch economist Ethan Harris. Pay there has been going up for years. What's different now, he says, is that labor costs have reached a point where Chinese exporters can no longer easily absorb them, and are instead passing them on. That's particularly true for labor-intensive items like shoes. In a note to clients early this year, Mr. Harris estimated that labor accounts for roughly half the export cost of a Chinese-made sneaker.

"I think it put them up against their profit wall, and then the pass through started to get quick," he says.

That was Big Agnes Inc.'s experience, says Bill Gamber, co-owner of the Steamboat Springs, Colo., camping-gear company. "Our suppliers were doing well for a long time, and absorbed the cost, and all of a sudden they're like, 'we can't do this anymore,' " he says.

The company has figured out ways to hold some costs down. It found a cheaper fabric for its tents, for example. But it still is raising prices. A popular sleeping bag that Big Agnes has priced for years at $199 will be $239 when the 2012 version is rolled out next month....

As I've discussed a lot here, import taxes on basic necessities like food, clothing and footwear disproportionately affect low-income Americans who must spend a larger share of their paychecks to afford the everyday things that they need.  For example, if Single Mother Mary makes $500/week, that additional $40 for a sleeping bag could (would?) prevent her from buying it for her son, Lil' Timmy.  Meanwhile, that price increase might have little effect on Rich Lawyer Larry.  So when we impose taxes on Chinese (or other countries') imports, or demand that they otherwise increase the prices of their goods and services, guess who hurts more?  Yep, Mary (and Lil' Timmy).

So congrats, currency hawks.  Looks like you're finally getting what you really want: higher prices for, and regressive taxes on, US consumers.

Mission Accomplished?

VIDEO: The (Typically Unseen) Victims of US Antidumping Law

I've frequently discussed the unseen victims of tariffs imposed on imports into the United States. Often these new taxes on US consumers are imposed in the name of "fair trade."  This new Cato Institute video sums up the problems surrounding those tariffs in a great new video that's so clear and simple that even a Congressman can understand it.  (Well, maybe....)




Cato's Dan Ikenson discusses the video and some of Cato's research on US trade remedies laws here.  Yesterday, he warned us of a particularly egregious decision over wood flooring from China, and unfortunately, his fears were confirmed today. (Higher prices at Lowes and Home Depot are sure to follow.  Whoopee.)

Monday Quick Hits

There have been several interesting developments over the last few days, so let's get right to them:

• Eight weeks after the 2010 mid-term elections, the Obama administration, ahem, boldly announces that it has begun the process of looking into whether it will maybe start letting Mexican trucks onto US roads again.  The Transportation Department proposal is here.  The Teamsters are "deeply disappointed," and Mexico sounds pleased, so this is looking pretty good.  But let's be very clear here: nothing has changed yet.  Mexican trucks are still banned from US roads, and $2.4 billion worth of US exports will continue to face retaliatory Mexican tariffs - as they have since 2009 - until this agreement is finalized.  Today, USTR Ron Kirk and his Mexican counterpart Bruno Ferrari optimistically announced that it could be at least 4-6 months before the program begins (it apparently needs congressional approval), and Mexico will stop adding or removing products from its retaliation list.  Nevertheless, the tariffs will remain: "Once we have dates, time frames and the manner in which this Nafta mandate will be met, we'll present and discuss the process to lift the retaliatory tariffs," Ferrari said.

• Are things looking up for the US-Colombia FTA's prospects in the 112th Congress?  According to Inside US Trade, ranking member of the House Ways & Means Committee Sander Levin (D-MI) and Senate Finance Committee Chair Max Baucus (D-MT) separately have announced trips to Colombia over the next few weeks.  These visits will definitely give both top Democrats (and any others joining them in body or spirit) a new excuse to support the FTA, despite strong resistance from US labor unions and many, if not most, of their fellow Dems.  As you may recall, similar trips to Peru back in 2007 gave Levin and former Ways & Means chairman Rangel cover to support the US-Peru FTA.  On the other hand, supporters of the US-Colombia FTA shouldn't get too excited - the FTA remains organized labor's most-hated pending agreement; the White House still hasn't gotten behind the agreement (although the Daley Chief-of-Staff pick is a reason for optimism); and Levin and Baucus are some of the Democratic Party's more reasonable folks on trade, especially trade agreements that would boost automobile and beef exports.  Nevertheless, the Levin/Baucus trips are a good thing, and maybe, just maybe, they're a sign that the Democrats' absurd resistance to the Colombia FTA is fading.

• Martin Feldstein, former chair of Reagan's Council of Economic Advisors recently predicted that the US-China current account deficit should disappear in the next few years.  Today, China announced its 2010 trade balance, and its surplus is dramatically smaller than anyone was expecting.  "Chinese exports increased 31.3 percent last year as global demand recovered, but the extent of China's outperformance was underlined by a 38.7 percent jump in imports, fueled by its voracious appetite for oil, iron ore and other commodities." As a result, "China's full-year [2010] trade surplus was 38 percent lower than its pre-crisis peak of nearly $300 billion in 2008."  I've repeatedly cautioned that global supply chains now limit the predictive value of these trade stats.  Nevertheless, it appears - on the surface at least - that some changes are afoot.

• The Daily Caller reports that the United States is missing out on being a big exporter of, wait for it, horse meat.  But because of a 2007 USDA rule that effectively banned the slaughter of horses, the 1 billion global consumers of horse meat get their food elsewhere.  Oh, and here's a real shock: the "saved" American horses apparently suffer far worse fates than the slaughterhouse, and they're causing serious environmental problems in several Western states.  And the Law of Unintended Consequences wins again.

• Politico: "Leaders of 1,655 companies and associations sent letters this week to ever member of Congress pressing for passage of all three pending free trade agreements (Korea, Colombia, Panama). House letter: http://politi.co/gGKSkb Senate: http://politi.co/gsIam3."  Me: please note the letters' typical overemphasis on exports.  Sigh.

• New research shows that bank deregulation had a significant, beneficial effect on income inequality.  Says Cato's Mark Calabria: "[W]e need to examine banking regulation/deregulation as it actually occurs and is implemented, and not how we believe some all knowing, benevolent government would impose it. The odds seem to me that the more extensive is banking regulation, the more likely it is to be captured by economic elites and narrow interests."

That's all for now.  Happy reading.  (And Go Ducks.)

Videos Worth 100000000 Words

In lieu of more KORUS speculating or other trade-related fare, here are two great videos that are totally worth your time.  The first is Reason's take on one of my favorite economic subjects: the Law of Unintended Consequences.



The second is a brilliantly hilarious take on the looming fiscal disaster that is out public sector pension system from (I think) the folks at the California Foundation for Fiscal Responsibility:



Enjoy!

Green Subsidies: India's Unfortunate Lesson

One of the focal points of the President's plan for reviving the US economy is federal subsidies for "green manufacturing" and "clean energy." Now, I've already laid out a lot of serious problems with such plans - the most important of which is America's unblemished record of utter incompetence when it comes to subsidizing products and companies to further vague environmental objectives. But another serious problem with green (and, well, pretty much all other) subsidies is the fact that they almost always lead to lots of harmful unintended consequences.

From today's Wall Street Journal comes an absolutely perfect (and sad) example in India of just how bad the unintended consequences of "green subsidies" can get:

India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year. The country now produces less rice per hectare than its far poorer neighbors: Pakistan, Sri Lanka and Bangladesh.

Agriculture's decline is emerging as one of the hottest political issues in the world's biggest democracy.

On Thursday, Prime Minister Manmohan Singh's cabinet announced that India would adopt a new subsidy program in April, hoping to replenish the soil by giving farmers incentives to use a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it....

Agriculture has lagged behind other industries such as manufacturing and services, posting less than 2% growth in the latest reports on gross domestic product. And double-digit food inflation and declining yields spell less money in the pockets of rural Indians.

India spends almost twice as much on food imports today as it did in 2002, according to the Ministry of Agriculture. Wheat imports hit 1.7 million tons in 2008, up from about 1,300 tons in 2002. Food prices rose 19% last year....

Behind the worsening picture is the government's agricultural policy. In an effort to boost food production, win farmer votes and encourage the domestic fertilizer industry, the government has increased its subsidy of urea over the years, and now pays about half of the domestic industry's cost of production.

Mr. Singh's government, recognizing the policy failure, announced a year ago that it intended to drop the existing subsidy system in favor of a new plan. But allowing urea's price to increase significantly would almost certainly trigger protests in rural India, which contains 70% of the electorate, political observers say.

The ministers of fertilizers and agriculture each declined requests for interviews....

Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts.

Like humans, plants need balanced diets to thrive. Too much urea oversaturates plants with nitrogen without replenishing other nutrients that are vitally important, including phosphorus, potassium, sulfur, magnesium and calcium.

The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.

As the soil's fertility has declined, farmers under pressure to increase output have spread even more urea on their land....

Yikes. Be sure to read the whole thing here.  What's most interesting is the vicious cycle that developed in India because of the original, and relatively small, fertilizer subsidy program that started over 40 years ago.  The first fertilizer subsidies produced a powerful and bloated industry and millions of dependent farmers.  With all those new companies and farmers, more subsidies followed, and the cost of the subsidy program exploded - it was about $640 million in 1976 but $20 billion last year.  When the government sought to reduce or eliminate the subsidy, the industry and farmers fiercely protested and, with the help of their favorite legislators, forced the government to "compromise" in the early 1990s and only subsidize one kind of fertilizer - urea.  That decision led to even more urea production and use, and not only started harming crop yields, but also destroyed domestic manufacturers of competitive fertilizers like phosphorous.  So the government decided to subsidize those fertilizers, but the subsidy, bound by budget constraints, was too small and failed to jumpstart production of urea alternatives, thus wasting millions of taxpayer dollars and doing nothing to solve the government-caused problem.  In the end, the urea subsidy remains (mostly) in place, state budgets are buckling, crops are suffering immensely, and both the domestic fertilizer and agriculture industries are proving increasingly unprofitable (thus, imports are increasing rapidly to fill the void).  Oh, and all that fertilizer overuse has severely tainted the local water supply around many farming communities.

All in all, it's an abject disaster bordering on national tragedy.  All because of a few million dollars in "green" government fertilizer subsidies.

But I'm sure that the billions and billions of dollars that President Obama wants to provide to his favorite "green" companies won't have any of these nasty unintended consequences.  I mean, all of our other forays into the environmental market have worked out so gosh darn well, right?

Riiiiiiiight.

Adversary Economics, ctd.

Two points I failed to mention in last night's critique of President Obama's adversarial approach to international economics:

(1) Adversary Economics has been a consistent theme for this President.  Indeed, in his February 2009 speech to a joint session of Congress (aka fake State of the Union Address), Obama spoke in very similar "us versus them" terms:

We know the country that harnesses the power of clean, renewable energy will lead the 21st century. And yet, it is China that has launched the largest effort in history to make their economy energy efficient. We invented solar technology, but we’ve fallen behind countries like Germany and Japan in producing it. New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea.

Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders – and I know you don’t either. It is time for America to lead again.

(2) US green subsidy programs do produce one thing other than "fraud, corruption and immense lobbying bills": boatloads of harmful unintended consequences.  I've mentioned this fact repeatedly in earlier blog posts, so I'm annoyed at the initial oversight.  But it does give me an opportunity to point out another ridiculous case of green subsidies' awful unintended consequences, as noted in a fantastic article on new biomass subsidies from Sunday's Washington Post:

It sounded like a good idea: Provide a little government money to convert wood shavings and plant waste into renewable energy.

But as laudable as that goal sounds, it could end up causing more economic damage than good -- driving up the price of raw timber, undermining an industry that has long used sawdust and wood shavings to make affordable cabinetry, and highlighting the many challenges involved in decreasing the nation's dependence on oil by using organic materials to create biofuels.

In a matter of months, the Biomass Crop Assistance Program -- a small provision tucked into the 2008 farm bill -- has mushroomed into a half-a-billion dollar subsidy that is funneling taxpayer dollars to sawmills and lumber wholesalers, encouraging them to sell their waste to be converted into high-tech biofuels. In doing so, it is shutting off the supply of cheap timber byproducts to the nation's composite wood manufacturers, who make panels for home entertainment centers and kitchen cabinets.

While it remains unclear whether Congress or the Obama administration will push to revamp the program, even some businesses that should benefit from the subsidy are beginning to question its value....

The new subsidy provided a critical boost to an industry that took off in the late 1970s after the federal government mandated that utilities obtain part of their supply from independent power producers. Many of these contracts have now expired, leaving the industry struggling to compete in light of low natural gas prices and higher wood costs.

The future of the biomass program -- which will eventually include a subsidy to get farmers to grow crops such as switchgrass and an array of trees and shrubs -- could be determined by the Office of Management and Budget, which has been reviewing the federal rule for the program since September. In the meantime, federal money has started to flow: The administration sent $23 million to the state offices of the Farm Service Agency in the fall, and is poised to distribute another $514 million.

Biomass energy representatives, such as the Biomass Power Association president, Bob Cleaves, said those subsidies are critical to support a sector that currently supplies half of the nation's renewable energy (the other half coming from wind, solar and other sources). Seven of Maine's 10 biomass energy plants would have shut down without the new influx of funds, he said.

"The industry needs help," Cleaves said. "Is the country not prepared to spend half a billion dollars on half the country's renewable energy resources?"

The Agriculture Department, for its part, says it has no choice but to implement the subsidy the way Congress envisioned it under the 2008 farm bill. That legislation made no distinction between a waste product with little market value, such as corn husks, and the sawdust that sells for roughly $45 a dry ton.

Farm Service Agency Administrator Jonathan Coppess said his agency is strictly adhering to the statute's language and intentions. "We understand that policymaking, legislation and rule making are perfecting processes, not perfect processes, and we look forward to providing the best regulation possible to implement an important program with significant potential to benefit our national energy and agricultural economies," Coppess said in a statement....

The federal government can provide up to $45 a ton in matching payments to businesses that collect, harvest, store and transport biomass waste to an authorized energy facility. That means sawdust or wood shavings may be twice as valuable if a lumber mill sells them to a biomass energy company instead of to a traditional buyer.

This is bad news for the composite panel industry, which turns these materials into particleboard and medium-density fiberboard, and outranks the U.S. biomass industry in terms of employees and economic impact, with 21,000 employees and annual sales of $7.9 billion, according to 2006 U.S. Census data.

The biomass subsidy program could "wipe us out," said T.J. Rosengarth, the vice president and chief operating officer of Flakeboard, the largest composite panel producer in North America. "You can say, 'I've made more alternative energy,' but at what expense?"

The much larger pulp, paper, packaging and wood products industry, which ranks among the top 10 manufacturing employers in 48 states, is just as worried. The American Forest and Paper Association sent a letter to OMB on Oct. 27 warning that the biomass program "could have the unintended consequence of jeopardizing the forest products industry and the many jobs it sustains, as well as the significant quantities of renewable energy it produces."

I don't know about you, but my favorite part is the bureaucratic buck-passing.  Fantastic.

(H/T Phil Levy)