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.
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.
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.