Cassava for biofuel--no free lunch

The biofuels industry is on a quixotic quest for a free lunch--to find raw materials that don't cost anything--switchgrass, jatropha, used vegetable oil, wind, etc. Most of these are years or decades away from practical use. But let’s consider cassava, also known as tapioca, a “nongrain” feedstock that has already been brought into production.

In December 2007 China opened its first biofuel factory that uses a nongrain feedstock—cassava, also known as tapioca. Cassava is basically a weed that will grow anywhere. You just stick a piece of it in the ground and come back 8 months later to pull up its starchy root. It grows mostly in Guangxi Province and other parts of Southeast Asia where there is lots of rain, sunshine, and marginal soils. The idea is that biofuel can be produced from cassava without diverting grain away from food or feed users—that is, basically a “free” good.

(If you skipped the first chapter of your economics textbook, the basic fact of scarcity is that you can’t get more of one good without sacrificing something else. It turns out that the law of scarcity applies here too.)

It turns out that cassava has become a fairly significant source of starch that substitutes for corn in China. When I looked into China’s customs statistics last week I discovered that China has been importing increasing amounts of cassava—up to nearly 5 million metric tons in 2007. That’s about the amount of corn that some past projections predicted China would be importing by now. (Interestingly--coincidentally or not?--it is also about equal to the amount of corn China exported in 2007.)

China’s starch industry has been that fastest-growing use of corn. It uses corn and other starchy substances to produce hundreds of different products like sweeteners, msg, pharmaceuticals, glues, textiles, etc.

One of the stories we’ve been hearing from China is that corn markets have been getting tighter—that increasing industrial use of corn from factories built in the corn-surplus northeastern provinces was reducing the amount available to the industrial starch behemoths in Shandong Province. It turns out that most of the cassava imports go to these big starch-producing regions—the Qingdao (Shandong) and Nanjing (Jiangsu) districts. It looks like the starch producers have coped with tighter corn markets by importing cheaper cassava from Thailand and Vietnam. Thus, China has averted corn imports at least in part by importing cassava instead. Analysts have been predicting for years that China will become a corn importer, but they never do. No one ever considered that cassava could be a cheaper source of starch that China could use to meet its growing demand for starchy substances.

We have here a rightward-shift in demand for cassava. A new biofuel plant in Guangxi, factories using more imported cassava in northern China. Southeast Asian countries are on the biofuel bandwagon too, encouraging their own producers to make biofuel from cassava. The result of increased competition is climbing cassava prices. There is no free lunch, even in biofuels.

China’s imports of cassava have plunged in 2008, which is probably due to the surge in prices. Guangxi’s crop was hurt by low winter temperatures. Someone is not getting as much cassava as in previous years. I suspect the hundreds of small starch factories and livestock producers in Guangxi and other parts of southeast Asia that have used cassava as their raw material for generations are now suddenly finding themselves priced out of the market. Cassava is not a free good. Using more of it to produce biofuels will divert it from other uses, forcing up prices, and straining supplies of substitutes—like corn.

Another news report last week said there are plans to build a cassava-based biofuel in Hainan Island which would use cassava produced on land acquired by the biofuel company in Laos, an example of the controversial policy of acquiring land in developing countries to produce China's food (and fuel?) needs. Watch out world, here comes China!

U.S. and China: Joined at the Hip

A very well-done article by David M. Dickson in the Washington Times, "China's Economic Bargaining Chip," explains the economic co-dependency of the United States and Chinese economy. As I've attempted to explain elsewhere on this blog, the U.S. economy is addicted to consuming more than it produces and consequently to debt while the Chinese economy is compulsively producing more than it consumes. China sends the cash from its trade surplus back to the U.S. to invest in Treasury Bills--i.e. it is financing much of the growth in U.S. government debt. It turns out that China's financial wizards have lost a lot of dough investing in U.S. companies like Blacksone, Fannie Mae, and Freddie Mac just before their stock dropped like a rock. There was some discussion about this on my recent trip to China. Another interesting tidbit--the article notes that some Chinese citizens have noticed that China has been ploughing cash back into the U.S. economy, facilitating low interest rates and massive consumption by fat U.S. consumers while hundreds of millions of Chinese citizens eek by on a dollar or two a day.

The editors tried to play up the concerns about China getting a stranglehold on the U.S. economy through its increasing ownership of U.S. companies. These alarm bells have been sounded before--the Saudis in the 1970s and Japanese in the late 1980s.

The more alarming aspect is whether this co-dependency can be broken without the whole thing spinning out of control. The U.S. is trying to avert the consequences of its profligacy by spending even more on a big tax "stimulus", commitments to bail out failing financial firms, the new mortgage bill, and pumping even more money into the economy by keeping real interest rates near zero. Meanwhile, China has gotten itself into a hole by holding its exchange rate down too long. It has been trying to gradually appreciate its currency over the last year-plus, but that has attracted lots of hot money with nowhere else to go. As long as the Chinese exchange rate is ticking upward at a steady predictable pace, it makes lots of sense to put your money in China, and lots of investors are doing just that. Consequently, China's foreign exchange reserves are exploding--up to $1.8 trillion now and expected to reach $2.5 trillion next year. China's monetary authorities are struggling to keep inflation under control. At the same time, its lucrative property market--the source of much of China's new-found glitz and wealth--has turned south.

Some have raised this interesting point: If we're learning that U.S. financial institutions were not as healthy as we thought, what hidden hazards might hidden in the balance sheets of Chinese banks?

The train doesn't seem to be slowing down; it's gaining momentum. Can it be slowed without leaving the tracks?

Wheat Opportunity Cost in Farmers Daily

China has come a long way from the days of Marxism-Leninism. The Farmers Daily newspaper (the title used to be translated Peasants Daily in the old days) brings up the economic concept of “opportunity cost” in a July 16 article discussing declining profits from selling wheat, showing that Adam Smith may be more influential than Mao Zedong in today's Chinese economy.

The journalist notes that fertilizer and diesel prices have raised wheat production costs about 80 yuan per mu (that turns out to be about $80 per acre at the present exchange rate). The government raised the minimum price for the recently-harvested wheat by about 0.05 yuan per jin. With a yield of 800 jin per mu, that works out to an increase of 40 yuan in revenue per mu, so profits are slimmed down, and farmers are wondering whether market conditions might push prices higher in coming months, making it advantageous to sell later. (By the way, wheat and rice are the only major crops that have minimum prices--most prices are determined by market forces).

The Farmers Daily article points out that farmers are less eager to plant grain due to the declining profits. Moreover, the journalist points out, the opportunity cost of farmers’ labor is higher due to the improving nonfarm economy. The opportunity cost is the return that the owner of a factor of production could have earned by employing his resources in the best alternative activity. (In another article this week, Chinese Commerce bureau apparatchiks somehow calculated that there are 130 million “surplus” farmers working in nonfarm jobs—a number about the size of the entire U.S. workforce.) There have been a number of articles and powerpoints lately expressing concern about declining profits from grain vis-a-vis off-farm jobs and warning that Chinese farmers may abandon grain production.

China’s policymakers have sealed off their grain market from high world prices. Keeping China’s grain prices lower than world prices keeps Chinese consumers from getting bent out of shape, but it denies Chinese farmers the benefits (and incentives) of high world grain prices. Thus Chinese farmers are not getting the signal that the world needs more grain. So they are going to the city to work instead. (Here in Nanning, Guangxi Province where I write this, there was a story on last night’s TV news showing workers who came to look for work in the city, couldn’t find any, and are sleeping in the park, with no money to go back home.) China could get short-term stability in grain prices at the cost of longer-term increases.

Market prices are a powerful mechanism for allocating resources. At least some journalists in China are now facile with economic concepts.

Africans in Guangzhou

As I arrived in the city of Guangzhou for the first time in 8 years I was taken aback by the number of Africans on the street. Dozens of young African men were going about their business in the area around my hotel. They were clearly not students, diplomats, tourists or 5-star executives—the kind of foreigners one expects to see in China. I was also intrigued by the number of restaurants with Arabic signs around town. I went back to my hotel room and consulted Google to find out what these Africans were doing in Guangzhou.

An English translation of an article from Guangzhou’s Southern Metropolitan Daily provided the answers. Over the past decade thousands of African and Middle Eastern merchants have been coming to China—mainly Guangzhou—to buy blue jeans and other budget-priced merchandise to ship back to their home countries, including Nigeria, Mali, Congo, Angola, Yemen, and Lebanon. By some counts there are at least 20,000 and perhaps 100,000 Africans in Guangzhou and the number arriving in China is growing 30% per year. A few have learned the language and settled down but many come on temporary visas for a few months at a time, rent a cheap room in “Chocolate City” on the outskirts of Guangzhou, and go to wholesale markets to haggle over prices, buy enough bric-a-brac to fill a container and send it home.

Other articles in Chinese newspapers suggest that local people have a mix of emotions toward the “dark foreigners” of fear and fascination. There are many cultural clashes and accusations of cheating, but also an alignment of business interests and a common instinct for haggling. A few Africans have settled down, borne children, and even married Chinese women, but most come and go on temporary visas and seem to be insulated from Chinese culture and somewhat repelled by it, especially the lack of religious belief among Chinese.

The Africans in Guangzhou are a visible sign of China’s integration with the world. China is not only supplying U.S. Wal-marts; it is also supplying the street markets of Lagos, Bamako, and Sanaa. It is taking in Sudanese and Nigerian oil and sending back skin-tight blue jeans, off-brand TVs, cell phones and motorbikes. China is not just supplying goods to wealthy U.S. and European consumers; it is also supplying goods to the poorest of the poor. The China manufacturing juggernaut is clearly not solely driven by labor costs.

Grain Bureau: No Corn Exports Until Fall

According to a corn industry report from yumi.com.cn, the head of China’s grain bureau said that the government will not issue corn export quotas until they see how the fall harvest goes in September. He said, “If this year’s harvest is not bad we could export some corn, but we have to make sure we first meet the needs of domestic feed mills and starch manufacturers.”

The report notes that imports and exports have a big influence on Chinese domestic grain prices. There is a big gap between China’s corn price and international price (China's price is lower) now so big imports are not going to happen. The report suggests that exporting corn could make domestic prices take off and strain the domestic supply-demand balance. The government has canceled the export tax rebate for corn since last December 20 and this year has added export taxes on corn and corn products of 5-10% and taken “reasonable control” of corn export quotas. At the same time the government strengthened its planning and guidance over the corn processing industry.

From the report:

China Corn exports, 2008 (Metric Tons)
===================
Jan-Mar 80,000
April 26,235
May 0

The cumulative total for this year is down 97% from year-earlier

China Corn imports, 2008 (Metric Tons)
===================
Jan-Mar 899
April 1,877
May 2,896

At last, China is a net importer of corn in May! ;) But less than 3,000 MT--that's a tiny amount. China typically exports 3 million MT a year. The cumulative total of imports for this year is roughly the same as last year.