State fairs are in full swing, and presidential hopefuls are getting acquainted with Iowans. As the first state to hold a caucus in the 2008 presidential primary, politicians take advantage of the state fair’s 1 million visitors to test the political waters.

It’s an odd setting for DC politics. The Iowa State Fair is a demonstration of how agriculture has helped shape a quirky Midwestern culture. Today’s events, for example, include a Mom Calling Contest, hot beef sundaes, rubber stamp art techniques, “Focus on Ostrich,” by the Iowa Ostrich Association, at least two goat milking competitions, and a titillating program entitled “How’s My Wienerschnitzel?” Ambivalent fairgoers can escape to the Iowa Wine and Cheese Garden starting at 11 am.

For anyone born and raised in Iowa, the real highlight is the butter cow. Lines typically snake around the Agriculture Building as eager Iowans wait for look at the cow crafted from 500-600 pounds of butter. While the Butter Cow Lady, Norma “Duffy” Lyon, has sculpted a new butter cow annually for the last 45 years, this year she gave up the reigns to her 29 year-old apprentice, Sarah Pratt. Over the years, Norma has also sculpted butter objects to keep the cow company in her refrigerated showcase. These butter creatures hold a funhouse mirror to Iowa culture: Grant Wood’s “American Gothic,” Elvis Presley, Leonardo da Vinci’s “The Last Supper,” John Wayne, The Peanuts Gang, Tiger Woods holding a tiger (really), and this year, Superman.

The Iowa State Fair also has another proud tradition: politicians eating fair food. Former Speaker of the House Newt Gingrich visited the fair last week and ate a pork chop on a stick. Delaware Senator Joseph Biden, who first visited the fair 20 years ago during his bid for president, was reportedly devouring a hoagie in one hand and an ice cream cone in the other.

Other politicians couldn’t help but compare the Iowa State Fair to home. Indiana Senator Evan Bayh commented that “I see you serve beer at your fair and we don’t” in Indiana. (Wait until he finds out what time the wine garden opens.) George Pataki observed that, “We have a great state fair in New York but… we don’t have pork on a stick.” Republican Senator Sam Brownback was at the Iowa State Fair yesterday and Senators John McCain and Bill Frist are expected today or tomorrow. Iowa Governor, Tom Vilsack, has also visited several times - no word on what he’s been eating, but as a native Iowan it’s unlikely to make much news.

So are the state fair visits paying off? According to WHO-TV’s informal “Cast Your Kernel” poll taken on August 16th, not really. Of the Republicans, Senator John McCain came out on top with 24 percent, followed by Rudy Giuliani and Condoleezza Rice each with 20 percent. Neither of the leading Democrats has yet paid a visit to the butter cow. John Edwards and Senator Hillary Clinton were tied at 33 percent, while Iowa’s own governor Tom Vilsack came in third with 13 percent.

It seems that the 500 pounds of butter in the butter cow are enough to sustain the hopes of at least eight politicians. It is a copious amount - about 2000 sticks in all. That’s enough buttersticks to nickname 2,000 baby pandas, or draw butter for 2,000 lobsters. Or, you could butter 4,000 tubs of popcorn, or 16,000 pieces of toast.

And if you get addicted to shaving with butter like Kramer, you can get 16,000 close shaves out of this year’s butter cow. Those 500 pounds of butter would also fuel a very successful bake sale: 20,000 pieces of fudge, 35,000 of my mother’s famous brownies, 60,000 Toll House cookies, or 64,000 Rice Krispies Treats. Of course, if you’re in Iowa, you would most likely use 500 pounds of butter on 32,000 ears of sweet corn.

In a letter about his trip to Iowa, Newt Gingrich closed with this:

“…the process of electing the President of the most powerful country on earth passes through a state fair in rural America where more than one million people come with their families to eat nearly anything that comes on a stick, compete in numerous agricultural competitions and contests, ride the rides, enjoy the shows and see the ‘butter cow,’ but that is how we do it in America, where a free people get to put their candidates to the test face to face.”

Fair enough.

Notes: According to the new butter cow lady, Sarah Pratt, this year’s butter cow is a Jersey and requires about 500 pounds of butter.

Assumptions: One ear of Iowa sweet corn only requires half a tablespoon of butter. Popcorn needs 1/4 cup per tub. Lobsters apparently require 1/2 a cup. Statastic does not advocate sautéing pandas, no matter how delicious that might be. Butterstick was blogosphere’s attempt to name Tai Shan, the baby Panda at the National Zoo.

Today’s announcement that British Petroleum would be taking crude oil production offline to make urgent repairs drove up oil prices to $77 a barrel. So what about those renewable resources we keep hearing about? We want to break the oil addiction!

Ethanol is indeed sparking renewed interest and a flurry of investment in the U.S. Most of the 3.9 billion gallons of ethanol came from corn and was used in the states where it was grown. Impressive until you realize that Brazil produces 4.8 billion gallons of sugarcane-based ethanol, providing about 40% of their annual gasoline needs.

We have been producing ethanol-based fuels in the United States for decades. Most of the Midwestern states (see charts below) that benefit from $4 billion in corn subsidies have an available 10% mix of ethanol in their gasoline. And with low corn commodity prices, high gas prices and a lack of ethanol refining in the Midwest, it has created the perfect investment storm.

Profit from Archer Daniels Midlands’ (ADM) corn bioproducts increased from $259 million to $446 million this year, and they have aggressive expansion plans. According to today’s Barron’s:

“In the past year, the difference between ethanol [prices] and corn prices has soared from less than 50 cents to about $3.10 a gallon…. That’s lifted the annual return on capital for some ethanol plants toward 50% and set off a stampede of new investment in ethanol refining.”

So it will come as no surprise that the ethanol industry has a strong lobby to protect itself. It’s a twisted relationship. The federal government’s price supports and subsidies regularly create overproduction of corn. This drives corn prices lower suppressing world prices (something the developing nation’s rightly bemoan).

Some of this surplus is used for ethanol. Why? Refineries - and consumers - are incentivized by a $.51 per gallon tax credit for 10% ethanol-based gasoline. Ethanol producers also enjoy significant trade protection in the form of a 2.5% ad valorem tariff and import duty of 54¢ per gallon of ethanol.

In August, 2006, Amani Elobeid and Simla Tokgoz from Iowa State University published a paper that analyzed the economic effects of removing these protections:

“The study finds that the removal of trade distortions induces an increase in the world price of ethanol and a decrease in the U.S. domestic ethanol price, which results in a decline in U.S. ethanol production and an increase in consumption. Consequently, U.S. net ethanol imports increase significantly….”

The Iowa State paper shows that if we were to remove trade barriers and the tax credit, we would see a 14.46% price drop in ethanol for consumers. Ethanol currently makes up 10% of our gasoline in a limited number of markets in California and the Midwest. Lifting trade barriers would allow Brazilian ethanol to more easily reach ports on the East Coast.

Yet we continue to protect ethanol refineries. ADM Chief Executive Patricia Woertz told Barron’s that “ethanol demand could triple. ‘It looks like it has room to grow to 14 billion or 15 billion [gallons per year],’ she said, ‘which is a full 10% blend in the gasoline pool in the United States.’”

Barron’s analysis of the ethanol market was about as sheltered as the heavily-protected ethanol refining industry: “Unfortunately, before ethanol refiners can reach that goal [14 billion or 15 billion gallons per year], they might reach the limits of the country’s corn supply. America’s entire corn crop would satisfy just 12% of gasoline consumption, leaving no corn to feed livestock and humans.”

No corn to feed our delicious cows? Once we remove ADM’s trade protections and give the Brazilians a new market for their ethanol, we should have plenty of corn to feed those future Big Macs. It will help our farmers counteract the predicted 1.7% drop in domestic corn prices, and it might help lift some desperate Brazilians out of poverty.

Didn’t most of us learn competitive advantage in econ 101? This may be a good time for Congress to brush up.

Sources: Statastic research; Environmental Working Group - Farm Subsidy Database

Trade model based on scenario 2 in the following paper: “Removal of U.S. Ethanol Domestic and Trade Distortions: Impact on U.S. and Brazilian Ethanol Markets,” Amani Elobeid and Simla Tokgoz, Working Paper 06-WP 427, August 2006, Center for Agricultural and Rural Development, Iowa State University