The new food aid paradigm

Last week, Secretary of Agriculture Tom Vilsack signaled a major shift in U.S. food aid policy from providing American-grown emergency food aid to investing in agricultural productivity in developing countries:

"It is a more comprehensive, holistic view of food security that focuses on the notion that we want to make food more available, we want to make it accessible and we want to make sure that it is properly used," Vilsack said in a speech to the Chicago Council on Global Affairs. "If we can help countries become more productive themselves then they will be in a better position to feed their own people," he said.

The World Bank was already moving in that direction. Then this week, the G8 followed suit:

The G8 countries will this week announce a “food security initiative”, committing more than $12bn for agricultural development over the next three years, in a move that signals a further shift from food aid to long-term investments in farming in the developing world.

In many ways this "teach a man to fish" approach is a welcome change (although not unprecedented - under none other than the recently much-discussed Robert McNamara, the World Bank made a major push into agriculture in the 1970s, with mixed results).

On the other hand, improved productivity alone cannot eliminate hunger - the UN Hunger Task Force estimates that only ~50% of the now more than 1 billion undernourished people in the world are smallholder farmers, with the remainder mostly rural landless or urban. Improved productivity can move the poorest smallholders from net food buyers to net sellers, but it is unlikely to have more than a marginal impact on world cereal prices, so social safety nets will remain an indispensable part of the food security equation until economic growth can raise incomes to the point where food becomes affordable to the rest.

Flex-fuel nation

Brazil breaks its record for flex-fuel vehicle sales in the first half of 2009:

Data published by the Brazil’s National Association of Automakers (Anfavea) on July 6 shows that more than 1.2 million flex-fuel cars were licensed throughout the country between January and the end of June, which represents 92% of all light automobiles and vehicles (Otto cycle, which excludes diesel engines) licensed during that six-month period. The total is 5% greater than in the same period a year ago, which is a new record for flex-fuel models in Brazil.

"We are experiencing a situation of irreversible consumer preference for flex-fuel cars, an option that is sustainable, economic, creates jobs and develops the national industry," said Marcos Jank, UNICA president.

Within a decade, Brazil's car fleet will be predominantly flex-fuel and ethanol and gasoline will be almost completely substitutable. By contrast, in the U.S. most car engines can't take much more than 10% ethanol (E10), which means that U.S. ethanol consumption is effectively capped at around 10% of total motor gasoline consumption.

This cap isn't constraining ethanol production now (in fact, with current relatively low oil prices, U.S. ethanol consumption is hitting the floor of RFS mandates), but it could in the hypothetical future world where oil prices are sustained above $100/bbl. In that case, corn growers would wish they could sell even more corn to ethanol producers, but buyers of corn for food and feed would be grateful for the cap on fuel demand for corn.

In Brazil, on the other hand, there is no such cap, which means that the entire sugar value chain is, for better or for worse, tightly linked with global petroleum prices.

Pat on the back

Forgive my amateur excitement, but a day after my post on Robert McNamara Philip Delves Broughton posted on the same section of his book, and then today Felix Salmon - probably my favorite finance blogger, highly recommended - excerpted the exact same quote I used.

For a brief, exhilarating moment I thought Felix had actually read my blog. Turns out not, but it is gratifying enough to know that I'm thinking along the same lines as someone I admire highly.

Their conclusions are both worth repeating. PDB:

One way of diagnosing an individual or institution suffering from the McNamara Syndrome is to observe how they respond to criticism. Do they accept it and try to make use of it? Or do they lash out contemptuously, sneering at those who dare criticize them? It’s a good test at which many businesses, individuals and even educational institutions do poorly.

And Felix:

When Wall Street quants fail to account for model risk, they can end up losing hundreds of billions of dollars. But that’s an improvement over what happened when McNamara failed to account for model risk: those losses were much worse.

The trick is in the transmission

Transmission line worries have claimed another victim, T. Boone Pickens' monster West Texas wind farm:

Last year, Pickens announced that he would build a 1,000-megawatt wind farm in Pampa, Texas. The problem a lack of a transmission line to bring the juice to population centers, Pickens said in an interview last week.

"I don't think the first place we build, though, is where we thought we would because we don't have the transmission," he said.

Remember that idea he had to build his own transmission line? "It was a little more complicated than we thought," he said.

The Pickens Plan envisioned a Midwestern "wind corridor" powering America and displacing foreign oil (natural gas would become our primary transportation fuel), but power lines are starting fights all over rural America, according to DTN's Chris Clayton. And wind is not the only renewable where the optimal generating locations don't coincide with population centers - California's Sunrise Powerlink also ran into stiff environmental opposition despite its potential to deliver clean solar and geothermal energy to San Diego.

The huge political challenge of siting and permitting new transmission lines is part of why people get excited about decentralized solutions like distributed solar. Ultimately, though, there are environmental complaints about every type of power generation - manufacturing solar panels emits powerful greenhouse gases, wind power kills birds, hydro power kills fish, etc. Negawatts can only take us so far, so ultimately there will need to be a compromise and trade-offs will be made.

The many legacies of Robert McNamara

Robert McNamara recently passed away. He's best known for being the Secretary of Defense who promoted a war of attrition in Vietnam. Tyler Cowen highlights how he shaped the World Bank into a modern technocracy. FP Passport remembers his advocacy of nuclear disarmament later in life.

In Ahead of the Curve, which I recently discussed, Philip Delves Broughton uses HBS grad McNamara as his closing example of the pitfalls of applying "modern business management" in other spheres:

The journalist David Halberstram wrote that McNamara mistrusted people who did not speak his language of statistics and hard data. If it ever came down to one person saying something "just didn't feel right" or that it "smelled wrong," McNamara would always go with his facts over their feeling. Fatally, in the case of Vietnam, the data he received were not accurate, and yet he trusted more in the illusion of reality generated by the faulty data - the clean, impersonal, objective facts - than in the messy yet accurate eyewitness reports brought home by journalists and soldiers.

Reflecting on McNamara should remind us that, for all its "scientific" appeal, data-driven management is eminently subject to the crap in, crap out principle.

The Kimberley Process works!!

Diamond aficionados or watchers of Blood Diamond are probably familiar with the Kimberley Process, which was established in 2003 to certify that rough diamonds do not originate from sources where diamond production fuels conflict. Turns out it is making an impact in Zimbabwe:

Zimbabwe has promised to withdraw its soldiers from diamond fields in the east, an official newspaper reported Sunday — a week after a rights group alleged the military was committing killings and abuses in the area.

The move appeared to be an attempt to diffuse criticism over the military's takeover of the Marange diamond fields and ensure that Zimbabwe's precious stones won't be tainted with the "blood diamond" label by activists, which would reduce their value.

...

Officials of the Kimberley Process Certification Scheme — the world's diamond control body — recently visited the fields following allegations that security chiefs and loyalists of President Robert Mugabe were either perpetrating or tolerating rights abuses and illegal diamond exports.

"There cannot be effective security where diamonds are concerned with the involvement of the military," the Kimberley delegation said in a report to the Zimbabwean government, quoted by the state-run Sunday Mail.

I doubt the Kimberley Process is completely airtight, but it's a great example of governments, companies and consumers coming together to formalize a structure which helps stem some of the violence and corruption that valuable resources inevitably engender. The case of Zimbabwe is particularly impressive since its rule of law is weak in so many other ways.

Hat tip to FP Passport.

Can water be a good business?

As any good capitalist knows, free market forces fix all problems. OK, maybe not, but in the case of water, whose importance as a natural resource is difficult to overstate, many people (myself included) believe that systematic underpricing (i.e., free or almost free) results in wasteful use. The immediate image that jumps to mind is showering for 15 minutes instead of 5, but agriculture accounts ~70% of human water demand and is the main culprit for water mining.

A water price reflecting the negative externalities of water overexploitation would in theory help avert a tragedy of the commons. Unfortunately, water resources are deeply politicized almost anywhere in the world, and while some places (like Texas and Australia) are seeing attempts to acquire private water rights, such rights are fraught with uncertainty:

"The idea that water can be sold for private gain is still considered unconscionable by many," says James M. Olson, one of America's preeminent attorneys specializing in water- and land-use law.

So, if it's difficult to apply market forces to the resource itself, can we at least get some private sector technological innovation in the house? Investors were excited about the recent IPO of Duoyuan Global Water (WSJ, sub. required):

In 4 p.m. composite trading, Duoyuan soared 37%, or $5.87, to $21.87. It sold about 5.5 million American depositary receipts at $16, above the expected price range of $13 to $15

Based in Beijing, Duoyuan makes equipment used to purify water and treat wastewater in China. It plans to use proceeds to improve its manufacturing facilities and production lines, build new ones and construct a research-and-development laboratory. Proceeds also may be used for acquisitions and general corporate purposes.

Duoyuan's revenue and earnings have been increasing at a fast clip, with its first-quarter profit nearly doubling to $4.2 million.

The water-treatment industry is competitive in China; Duoyuan's rivals include Chinese and international firms, including subsidiaries of Dow Chemical Co. and General Electric Co.

What remains to be seen, of course, is how these businesses perform in the long run. According to Google Finance, Duoyuan is currently trading at ~34x earnings. So as a colleague of mine remarked, if the company can double profits every quarter, maybe the math works out, but unless some pretty heroic assumptions pan out, Duoyuan's IPO will only go to show that "(China + Environment + Growth) x Excess liquidity > common sense."

Our new oil price paradigm

Environmental Capital marks the anniversary of oil prices hitting $145/bbl:

Friday is the one-year anniversary of crude oil’s record close of $145 a barrel. But commodity traders were in no mood for a party.

Oil prices dropped more than $2 a barrel to below $67 in trading in New York Thursday, beaten down by dismal economic news and word that the Organization of Petroleum Exporting Countries discipline is shaky.

To me, what's more dramatic than the fall over the last year is our collective reframing and reanchoring of how we view oil prices. Brent averaged about $29/bbl (in 2005 dollars) between 1985 and 2005, below even its recent nadir (mid $30s?)... and yet we think about $67/bbl as less than 50% of the recent peak, rather than >100% greater than its long-run average of the past two decades.

P.S. Of course, there are always people out there willing to take the extreme views ($200, $20).

A world after fossil hydrocarbons

There are no shortage of proposed solutions for our future energy needs on the internet, and while I don't find the Green Sheet's "Seven Ways to Solve Our Energy Problem" particularly outstanding among them, kudos for assembling this eye-catching graph:


One can quibble with the exact level of the curves (The Oil Drum tends to be fairly vocal on Peak Oil, for example, so another source might not show oil falling to essentially zero), but there is no escaping the fact that our great grandchildren's energy mix will need to look radically different than our own today.

I think the interesting philosophical question is whether market forces alone will allow a smooth transition to that new energy mix, or whether large-scale government intervention is needed to engineer it.

Market forces are powerful - the oil price spike in the 1970s spurred a wave of new exploration, resulting in major finds in Alaska, the Gulf of Mexico, and the North Sea, and the spike in 2007/8 saw a massive influx of investment in alternative energy.

As for government's role, there is on one hand a compelling argument to be made that the key enabler of the technological explosion we've seen in the last half century was not private-sector innovation, but rather the dividends from unprecedented government research into basic science, which the private sector picked up and ran with once they reached appropriate maturity (see: nuclear power, the computer, the internet, the cell phone). On the other hand, the government's track record as a market engineer is mixed at best. I don't have the whole answer, but there's no question in my mind that continued government funding for basic scientific research has to play a part.

Finally, as Green Sheet says, those who criticize should offer paths of their own, so for what it's worth, the biggest differences between my current working hypothesis and Green Sheet's proposed solution are:

1) I would not rank rail as Priority #1 (I assume they're referring primarily to urban public transit, but there will still be transportation fuel demand for airplanes, intercontinental commercial shipping, etc.)
2) I would rank energy efficiency much higher
3) I am more optimistic about nuclear, particularly in the long term, given the potential for new technology breakthroughs

P.S. Not to mention existing nuclear technology. Dan Frum via Andrew Sullivan:

This past week, I had an opportunity to visit French nuclear facilities as a guest of the U.S. Nuclear Energy Institute. At the end of the trip, I was taken to the large concrete-lined below-ground chamber in which the French store the most hazardous of the nuclear wastes generated by reprocessing. The room in which I stood held something like one-third of the total of all the most hazardous waste produced in France since the 1960s. It was rather larger than a high school gym. I stood atop of a concrete disk with a numeric code. Beneath that disk was a cylinder of concrete perhaps 5 meters deep. Below that was 10 meters of empty space, and below that a stainless steel tube holding nuclear byproducts. After my visit to the room I was scanned for exposure to radiation. My dose? About half as much as I had absorbed on the flight from the U.S. to France, about the same amount as I’d have ingested from a small dish of mussels.

P.P.S. Coincidentally, Tony Blair just outlined his seven policies to fight global warming:

The seven short-term measures proposed by today’s report are: incentives to stimulate wind and solar power; improving the efficiency of machines used by industry; better building codes; reducing the fuel consumption of vehicles; cutting the carbon content of fuel; setting new energy standards for domestic appliances; and cutting back on the level of deforestation.

Note that four of the seven are efficiency-related. My only complaint is that "cutting the carbon content of fuel" is meaninglessly high-level.

Running and reading are the keys to life

The consulting lifestyle often doesn't leave a lot of leisure time left over, particularly during the week, so how we use that precious time is often telling. Running and reading have historically been my personal activities of choice, so you can imagine I found it encouraging and gratifying to learn from Will Smith (via Ben Casnocha) that they are the keys to life.

I guess my new hobby of blogging didn't make the cut...

A poor choice of name

As FP Passport and Chris Blattman have noted, the new Nigerian-Russian energy venture may not be off to the most auspicious start:

It probably seemed a good idea at the time. But Russia's attempt to create a joint gas venture with Nigeria is set to become one of the classic branding disasters of all time -- after the new company was named Nigaz.

Where on the Curve?

I happened to pick up and re-read Ahead of the Curve by Philip Delves Broughton during the last few days. His wry account of his two-year MBA at Harvard Business School garnered a lot of attention and mixed reviews when it came out last year. The HBS administration, students, and alumni were predictably unhappy (PDB was unperturbed). The general reading public and editorial reviewers were more positive. A friend of mine read it recently and summed it up as "interesting for the context of what happens at HBS, but a bad book."

My purpose here is not to write another book review. In general I enjoyed reading it (twice) and recommend it - he is a witty writer and, while he may exaggerate for effect in some instances, his depiction in many respects rings true with what I've heard from myriad other sources. (Incidentally, buried in the generally critical Harbus review is the stat that 60% of students find PDB's portrayal "generally accurate", which the editor spins as "not an altogether convincing majority.") The two specific questions PDB raises that most struck me on the second reading are whether HBS helps its students to 1), be morally effective business leaders, and 2), successfully balance their work and family lives.



On the former, I don't subscribe to the ridiculous meme that greed originated at Harvard Business School (although it's hardly where greed goes to die, either). But read this anecdote...

It became a running joke in our section that if we ever discussed a company struggling to increase its value, members of the skydeck would start pumpin their arms up and down as if jacking up a car. It was the sign to "lever up," to load up the balance sheet with debt.

... and then tell me, out of every ten of these guys who ended up on Wall Street, how many of them do you think stood up to their bosses and protested that excessive leverage and securitization and systemic risk-taking would lead to disaster, rather than keeping their heads down and dancing until the music stopped? Granted I'm making this point rhetorically here, but I don't think it's an issue HBS should be blasé about (and judging from the MBA oath, students agree).



The latter is best summed up by PDB's classmate Nate near the end of the book:

"Lots of people seemed more interested in a number, the amount they would earn, than the life or future that would entail. And yet, when I think back to every case we studied and every protagonist who came to class, every visiting speaker, it seemed like all of them said 'I was a bad spouse' or 'I was a bad parent.' Not one of them could say, 'my family was a smashing success.'... But then when you saw how our class made choices, you saw they would do what these people do, not what they say."

It is a constant motif throughout the book - every time a Meg Whitman or a Jack Welch or a senior MD from a bulge-bracket bank comes to speak, their professional achievements are lionized and their corresponding personal failures are breezily ignored. The speakers who traded off fast-track success for the quiet life of being home for dinner every night and coaching their sons and daughters' sports teams are nowhere to be seen.

If in an unscientific exercise I count what proportion of HBS grads I know who are thrilled with their family lives, I know more who aren't than who are (and that holds for 5 and 10 years out of school, not just the first few). There's selection bias because I work in management consulting, but PDB shows it's clearly an issue of wide concern among the student body, and yet the vast majority of grads walk eyes-wide-open into jobs they know will not provide them the flexibility they want. Nate concludes:

"It was a surprise to me how making the right choices coming out of HBS would require real intestinal fortitude, a real functioning moral compass, because the forces pushing you to pursue success in a very specific way were overwhelming."

What is striking is not that these trade-offs are hard, because they most certainly are; what's striking is that even for this supremely accomplished and talented student body, the courage to make them seems tantalizingly beyond most.



HBS is a phenomenal institution that teaches many good things to a stellar student body, and PDB himself candidly admits he enjoyed his time there and is glad he went. But his book also raises insightful, probing questions which HBS' track record does little to rebut.

PUBLIC COMMITMENT: more value-added commentary

I just got some helpful blog feedback from a trusted friend:

Chief critique is you don't have enough original content... And when you link I wish you would give more context/input/opinion around the passage.

I think he is spot-on - I'd been feeling a bit of the same thing myself. Linking to interesting content with one-liner reactions is a time-constrained (is that a euphemism for lazy?) man's way to keep up momentum, but starting now my goal is to be a bit more selective, spend more time on fewer posts and use that time to provide more value-added original commentary. A public commitment is my current enforcement mechanism of choice - I'm not ready for the next level yet. Readers, keep me to it!!

Engage Iran by paying attention to Cuba instead

Like Andrew Sullivan, I loved this suggestion from one of his readers, in response to long-time engagement proponent's Roger Cohen's assertion that now is not the time:

The point is, what we hoped to have achieved by engaging with Iran has already occurred (partly by walking very softly during their election). Thus the aim of any talks now can achieve nothing but strengthening the legitimacy of the regime while before talks weakened it.

In fact, the best move I believe the president can make is talking, loudly, to Cuba. If you can disregard the legitimacy of the stolen election in Iran and push directly for more openness and economic prosperity in an equally adversarial country, there's your carrot and stick, without directly meddling in Iranian affairs.

Oops

FBI says Saddam's WMD bluff aimed at Iran.

Bingaman's energy bill: high praise, cloudy prospects

Geoff Styles breaks down in detail the many reasons he prefers Jeff Bingaman's existing energy bill to the non-cap-and-trade provisions of Waxman-Markey. In summary:

My strong preference would be for the Senate to graft a clean version of cap & trade onto Senator Bingaman's energy bill, jettisoning the distortions that Waxman-Markey acquired in the process of lining up enough House votes to ensure passage. Some of those distortions neatly cleaved the natural business coalition against the bill by lavishing so many free emissions allowances on the utility sector, but in the process severely undermined the bill's potential for achieving prompt and significant emissions reductions.

Unfortunately, this grafting seems the least likely path to a Senate cap-and-trade bill, as Styles explains. And with Harry Reid determined to yoke cap-and-trade and the energy bill together, I'm worried that Bingaman's hard-won bipartisan consensus-building will be for naught.

India takes a hard line - no GHG cuts

India's new stance on climate change is unambiguous and unencouraging:

India said it will reject any new treaty to limit global warming that makes the country reduce greenhouse-gas emissions because that will undermine its energy consumption, transportation and food security.

Cutting back on climate-warming gases is a measure that instead must be taken by industrialized countries, and India is mobilizing developing nations to push that case, Environment Minister Jairam Ramesh told the media today in New Delhi.

“India will not accept any emission-reduction target -- period,” Ramesh said. “This is a non-negotiable stand.”

India's moral argument is that 1), most of the excess greenhouse gases in the atmosphere now were pumped out by the now-industrialized countries, and 2), their emissions are still >15x below those of developed countries like the U.S. on a per capita basis:

Ramesh reiterated India’s previous offer to contain CO2 emissions per capita below those of developed nations.

India, the second-most populous nation, only emits 4.6 percent of the global carbon-dioxide emissions, while the U.S. produces 20.9 percent, he said.

Hard to tell if this is a negotiating tactic or genuinely drawing an ideological line in the sand, but particularly if it's the latter it will make it much harder to reach a global accord on reducing emissions (let alone if India gets China and Brazil on board).

The thin line between food safety and protectionism

From the WSJ (subscription required):

China is expected to ban imports of U.S. chicken in coming days, a move likely to deliver a blow to the struggling American chicken industry and escalate trade tensions between the two nations.

James H. Sumner, president of the Georgia-based USA Poultry & Egg Export Council, said he learned Tuesday from "several importers" in China that the U.S. wouldn't receive any import permits from the country's ministry of commerce starting July 1.

To the U.S., it is a food safety issue, whereas to China it looks like protectionism:

Mr. Sumner says the potential ban appears to be tied to a provision in the most recent U.S. spending bill that prohibits the USDA from allowing Chinese chicken plants to send poultry products to the U.S. Lawmakers question whether China's chicken processing plants meet U.S. standards.

A ban on U.S. chicken would be the latest example of food safety and trade colliding. In recent months the U.S. has been under pressure from lawmakers and trade groups to crack down on goods coming from China. China has responded with allegations of U.S. protectionism.

Both sides may have a legitimate point, so add this to a growing list of tricky trade issues on the table.

The ad hominem index

Richard Evans uses the "ad hominem index" to draw a glaring contrast between Greg Mankiw and Paul Krugman. Krugman's arguments are often loaded with personal attacks, whereas Mankiw's are admirably respectful and self-restrained. Although I don't always agree with Mankiw's conclusions, I heartily agree with Evans' conclusion: "Thanks to Milton and Greg for teaching by example."

Michael Roberts of Greed, Green and Grains notes the same argumentative style in Krugman's recent editorial on the treasonous planet-betrayers.

Iraq plays too hard on oil auctions

After an embarassing license round in which BP was the only major to buy in and 7 of 8 oil and gas fields remained idle, it's becoming clear that Iraq will need to be more accommodating with its terms to entice Western oil majors to play:

Iraq's hopes for an oil-revenue fueled postwar recovery suffered a sharp blow Tuesday as the foreign oil companies it counted on to help develop its vast reserves greeted the country's first oil auction in over 30 years with grumbles and just one deal.

...

Under the 20-year service contracts on offer, the companies would be paid a per barrel fee for any crude they produce in excess of a minimum production target. But the price requested by all the companies was at least twice as high — and in a couple of cases almost 10 times higher - than what the oil ministry was willing to pay.

Two oil executives from different companies at the auction complained that Iraq was offering too little money given the prevailing security risks and political uncertainty. They also complained that they were not given enough time to revise their bids — sometimes as little as 15 to 30 minutes. Both spoke on condition of anonymity because of the sensitivity of the issue.