Ethanol from Corn is a Dumb Idea!

There is a lot of hot air blowing in Iowa and across the US Midwestern states—and I am not just talking about politics or wind energy production.  The combination of an extended drought plus the ethanol mandate plus the weak economy plus the 2012 Presidential election cycle has combined into a ferocious debate over all of these issues.

On August 10, 2012 The US Department of Agriculture released a specialized crop forecast sure to send corn prices higher than their already record setting $8 per bushel.  The USDA report said corn production would be “sharply lower” down 22.6 bushels per acre to 123.4 bushels per acre making the current harvest the lowest forecast since the 1995-96 growing season.  The number of acres of corn expected to be harvested for was also reduced by 1.5 million acres reflecting USDA’s estimate of failed crops due to drought conditions.

Lower corn production hits home with higher food prices. It  also hits hard because US Renewable Fuel Standards require blending ethanol into gasoline.  For 2012, 13 billion gallons of ethanol is required to meet the target but that requirement gradually increases each year from 9 billion gallons in 2008 to 36 billion gallons by 2022.  The RFS also requires the use of cellulosic ethanol made from non-food crops except none is produced commercially in the US since it is uneconomic so refiners must buy credits or pay a penalty for not using it.  To maintain supply lines in the face of reduced domestic corn production imports are forecast to increase this year by 45 million bushels to 75 million bushels.  USDA said total US corn supply for the growing year would likely be at a nine year low falling by more than 2.0 billion bushels.  As a result USDA expects total US corn use to also fall by 1.5 billion bushels to 11.2 billion bushels—the lowest corn use in 6 years.

The first sacrifice in corn short years is feed for livestock. Ranchers have already begun to cull the herds.  In a campaign stop in Iowa August 13, 2012 President Obama announced that USDA would step up its purchase of meat buying $170 million in pork, chickens, lamb and catfish as the culling of the herds will create a short-term glut in the market with falling prices. The US will use the meat it hopes to buy at bargain prices for US food programs.  Economists predict longer term spikes in meat and other food prices as supply shortages ripple through the supply chain.

US EPA could waive the RFS ethanol use, but don’t count on it. Because of the ethanol mandate available corn supplies in shortages follow the price higher with the ethanol mandate driving up the cost of gasoline refiners who are required to buy it at any price unless EPA issues a waiver. So far it has shown no indications it will do so.  Last year, US EPA denied a waiver required by the State of Texas in the face of its severe drought conditions.

USDA is a spotty record of forecasting these things but the conditions on the ground suggest a worst case scenario this year in the absence of rain and the scorching hot temperatures. And worst case is exactly where the ugly politics of ethanol are taking us for the rest of this election cycle.  Even environmental groups which once favored ethanol production have soured on it claiming it uses more energy to produce than its saves in imports and emissions reduction.

But ethanol is the poster child for artificial markets created by government mandates and subsidies that are tough to stop once constituencies are in place.

As is true on many issues during this election cycle, facing reality about our economy, job creation, taxes, subsidies and pet causes is causing angst.  Ethanol mandates should be causing a lot more angst than they are.  Politicians campaigning in Iowa are unlikely to be truth-tellers on this subject. A healthy election debate on the pros and cons of the renewable fuel standard and the unintended consequences of ethanol mandates is good for the country and might even lead to a consensus on a way forward to pull our economy out of the ditch, but a lot of mud-slinging is going to happen getting there.