The Hidden Cost of Ethanol Subsidies

There has been much talk in recent weeks about corn subsidies in Iowa: Former Minnesota Gov. Tim Pawlenty had the guts to suggest the elimination of the subsidies in the heart of the Corn Belt, and Sarah Palin has also mentioned an end to farm subsidies as well.

It would seem corn is back on the radar after having fallen off after the 2008 election, when ethanol was no longer a convenient club with which to beat the Bush administration.

Before that particular fight was over, however, former President George W. Bush had signed legislation which required 40 percent of the U.S. corn harvest to be slated for ethanol production, and for massive subsidies to make corn economically viable.

We are now reaping the unintended consequences of those decisions. Accepting as fact that American farmers are the most productive in the world, and also accepting as fact that the agriculture sector is one of the few sectors of the economy which is performing well, we're still faced with a problem.

Coming off the third-highest corn harvest in U.S. history in 2010, the carryover (unsold corn still in the elevators) is a bare two weeks' worth of grain at current and projected usage rates.

This is precariously low, the lowest in modern history. The only time the carryover was lower was in the 1930s -- during the height of the Dust Bowl.

The problem here is the mandate, which assumes that corn -- which is used in pretty much everything from plastics to baby powder to animal feed -- will continue to see record yields. I live and grew up in Kansas, the heart of the Farm Belt, and the idea that every year will be a bumper crop is what we call urinating into a moving air mass.

This year could be a bad year; much of the corn in the eastern cornbelt is late getting into the ground, and from west Texas into Nebraska we've got the worst drought in 40 years. Parts of western Kansas have gotten no more than a quarter-inch of rain since the beginning of the year. This means the corn stocks could slip still lower.