The Hidden Cost of Ethanol Subsidies

Why is this a problem? Much like the price of oil, the price of grain worldwide is based on the dollar. In the case of oil, it's because we're the world currency and the largest user of oil. In the case of corn and indeed all grains, it's because we're the world's largest producer and exporter.

Think of the carryover stocks as the strategic oil reserve -- it's there in case we have a bad year. Should that happen we still have grain to sell, and we still basically control the price.

Now imagine we have to start importing grain. Suddenly Brazil or Argentina is setting the price, not us. Once you become a net importer of grain, you cease to be a world player in agriculture.

We're already dependent on countries who don't like us for our fuel. Does it strike anyone as a good idea to be dependent on them for food as well?

The issue with the mandate is that it is inflexible. Instead of allowing the market to decide how much corn should be sold to ethanol plants and how much should be sold overseas or used domestically, we're mandating a certain percentage must go to fuel.

I brought this up to a farmer friend of mine. He told me that about two-thirds of the corn used in ethanol plants is returned to the food chain as distillers grains, which are used for animal feed. Now this seemed a good point to me, but I wanted to check it out. So I enlisted the help of another friend and colleague, PJM's Charlie Martin -- he directed me to Wolfram/Alpha where I could see the numbers for myself. If the two-thirds of the 40 percent of the total harvest is used up, that means over 25 percent -- actually closer to 27 percent -- is simply gone. The total 2010 harvest was 12.45 billion bushels, so 3.32 billion bushels of corn has been burned in fuel tanks.

A fuel, it must be noted, which is inefficient when compared to gasoline, is hard on engines, and requires massive subsidies to be competitive with conventional fuels.

What remains to be seen is what happens next year, with the subsidies expiring, corn stocks likely lower yet, but a huge, inflexible mandate still requiring 40 percent of the crop go to fuel.

This is likely to be hard on food prices at a time when they are already going up. In an attempt to appease environmentalists -- for whom nothing is ever enough -- we risk mandating ourselves right out of dominance in one more area of the world economy.