Welcome to another edition of “What’s the Deal?”, the blog that subsidizes its puns for comedic fuel.
In this week’s blog post, we’ll discuss an ongoing economic and socio-political issue: the subsidization of ethanol production from corn in the U.S.
Spoiler Alert: It turns out that using more corn for fuel instead of livestock feed or for human consumption causes the global price of corn to rise significantly.
We’ll take a look at the history of government support for farmers and crops and why this relatively recent focus on corn-based fuels took place and what impact it has on the world, especially on developing countries.
A year ago on January 1st, 2012 Congress voted to end the Federal tax credit for ethanol production from corn (known in the biz as the Volumetric Ethanol Excise Tax Credit) – a tax credit that had lasted for 30 years. Does this mean that the United States will move away from having 40% of its corn crop go to ethanol production and instead further food production?
The answer is unequivocally, no.
Even though the annual subsidy, which cost the Federal government ~$6 Billion in 2011, has ended, the EPA will still require an increasing proportion of ethanol blended in gasoline, and incentives still exist. This means that at least the same amount of ethanol was produced in 2012 that was produced in 2011; the requirement just lacked the extra incentive. The United States will also continue to subsidize agricultural commodities such as corn through price support; an American tradition since before the Great Depression.
Since the mid 2000s, the United States and many other rich countries have focused on producing and using an increasing amount of biofuels to blend with gasoline, mostly corn based ethanol (but includes the possibility of bacteria derived fuel), to reduce dependence on foreign oil and to curb greenhouse gas emissions. But the focus on incentivizing ethanol is economic; certainly not in the specific interest of curbing climate change, though ethanol as an additive does help gasoline burn cleaner.
As a result of increased ethanol production in the U.S., an important study has shown that agriculture and the cost of food for developing countries has been impacted on a large scale. Since the U.S. began to focus more on ethanol, the price of grain for human and livestock has risen significantly for importing countries and global prices became more sensitive to weather impacts, such as the 2012 drought.
Countries dependent on American food imports like Guatemala that use corn for a great deal of its diet, have become very sensitive to global food price impacts. Farmers in Guatemala that had grown corn and other crops for generations suddenly found themselves without any internal demand for their products and their land became unsustainable. In addition, local farms began to switch to crops that can be used as raw materials for biofuels such as palm and sugar cane. Price shocks on corn like what happened this year severely impact the poor who must pay a greater proportion of their earnings for food.
Therefore, the concentration on ethanol production in the U.S. combined with over-production of corn in the states has had an indirect effect on the ability of people in developing countries to provide basic necessities. To take a deeper look at the issues, we’ll look into the policy decisions of subsidizing farmers, ethanol production, and what further impacts may be in the future.
Keeping Farmers Afloat – The Subsidy Life Raft
Subsidies for crops are nothing new – Great Britain created trade barriers to protect corn for centuries with their English Corn Laws which weren’t repealed until 1846. Paying farmers or keeping the price of crops at affordable levels for producers has been a staple activity for most countries.
Beginning before the Great Depression, U.S. federal support for farmers was initially a temporary measure, through the Grain Futures Act of 1922, the Agricultural Marketing Act, and the New Deal’s Agricultural Adjustment Act (AAA) – a life raft of revenue when prices were low and devastating droughts had afflicted much of the American “Bread Basket” in the 1920s. The “life raft” nature of the law is showcased in the AAA bill as a “Declaration of Emergency” and was supposed to end when the President deemed that the “economic emergency” had lapsed.
Sure enough, the economic emergency ended following the Post-WWII economic surge, but crop subsidies in the U.S. did not lapse.
Farmers continued to need Federal support in the decades following the second world war because American agriculture continued to have the capacity to produce more than domestic and international markets could purchase. Therefore, a surplus existed, lowering commodity prices and increasing the pressure on farmers – keeping the agricultural policy of the U.S. static. Now, while the U.S. could “afford” to keep their farmers afloat, this was not the case for many other countries who began to import grains such as corn because it was cheaper than growing it themselves.
Subsidies stuck around, albeit at a low level during the price spikes (and record profits for large farms) of the early 1970s, and became more relevant as a revenue source in the mid 1980s (during the farm crisis that spawned “Farm Aid”) and depended on into the 1990s and 2000s when subsidies accounted for nearly 47% of total farm income. Suffice it to say then, that help for farmers from the Federal government has been a consistent policy for most of the 20th Century, and into the present.
Now, What’s All This Then About Eth’nol?
The Renewable Fuel Standard (RFS) is a federally mandated requirement that all gasoline contain a minimum standard amount of ethanol. This provision was introduced in the 2005 U.S. Energy Policy Act and was expanded to contain a greater proportion of ethanol in the 2007 U.S. Energy Independence and Security Act. Between 2005 and 2007, the percentage of ethanol in the RFS nearly doubled, and rose from 3% in 2005 to 10% in 2011. In addition, the two laws required that the amount of ethanol (or other biofuels) produced increase each successive year, for example, requiring 9.2 billion gallons in 2008 and increasing to 13.2 billion gallons in 2012.
The corn lobby (I know, I want to be a part of that lobby too) helped introduce bills requiring ethanol distilled from corn in the 1980s and 1990s but the bills never became law because ethanol as a motor fuel is less efficient than refined gasoline. It is clear that without government support, ethanol would not have become a significant ingredient in gasoline. A focus on gasoline additives that produced less smog (than MBTE) and curb climate change helped propel the two energy policy acts and ethanol, but the effort to reduce dependency on foreign fossil fuel use was also a key in the energy acts and the move to ethanol.
Now, both issues that the energy policy acts use as motives for the increase in ethanol production are questionable at best. The effort of reducing dependency on foreign oil is questionable given that it takes fossil fuel use to produce ethanol (0.8 Btu’s to produce 1Btu of ethanol) – this contradiction may cause policy makers to rethink this specific motive of ethanol production. Higher global prices and government incentives for ethanol production influence farmers in other countries to cultivate more land for crops and reduce potential carbon traps (aka, trees), so the ethanol effect of reducing greenhouse gas emissions may be offset. The effect on the global corn price by increased ethanol production should make lawmakers rethink the strategy as well.
In estimating the effect on the price of corn from government mandated ethanol production, Carter, et al. conclude that corn prices would have been 30% lower between 2006 – 2010 if no increase in demand from ethanol production had occurred. Below average harvests in 2010 and 2011 further depleted food stocks and 2012’s drought hampered corn production further, with the USDA reporting a 17% decrease in supplies on December 1, 2012.
In 2011, the net loss to the food system from corn‐ethanol production was about
3.3 percent of global grain production – enough of a jolt to the global price that corn, a staple in many diets in developing countries would not be affordable.
Conclusion: What’s the Incentive?
So, this tale comprises a story of the Federal government helping farmers by either paying them or protecting the market value of their crops. We also examined the effects of this long standing tradition to the present for a specific product, ethanol.
What we can conclude from our story is that:
- State subsidies and price protection for domestic farmers has been a tradition for a long time
- Ethanol was considered a potential fuel source for autos for some time, but was not actually implemented until 2005 as a result of a government mandate.
- The focus on ethanol has increased its volume in gasoline, but has resulted in less food production, higher global corn prices, and has been ineffective at achieving its goals of lower fossil fuel imports and greenhouse gas emissions.
- The indirect effect of the ethanol production push has been unsustainable corn prices for consumers in developing countries.
There are several tangents which we could explore from this topic including the debate over the proper role for government in mandating the use of ethanol (or biofuels), the implications for international trade from price-protection measures (such as in the 1933 Agricultural Adjustment Act), the controversial donation policy of surplus American food, and the negative diet and nutritive effects that come from subsidizing corn, but those would require separate analyses (and I don’t like corn that much).
For people whose diets consist heavily of corn based food items such as in Guatemala, a corn-importer, the ethanol mandates from the U.S. and Europe have severely squeezed the population by nearly doubling the price of corn. This indirect effect of the ethanol mandate on global prosperity and health along with the lack of evidence of reduced dependence on fossil fuel and reduction of greenhouse gasses should make lawmakers look at what exactly the incentive really is for ethanol production.
With the 2012 Farm Bill recently extended, the ethanol issue will once again take a back seat issue for a year; but then again, most bills relating to agriculture don’t create as big a stir as other issues (because only 2% of us actually farm). This does not mean this should be a back seat issue though. The ethanol requirement deserves a revisit and its sunset should be considered given its controversial and adverse side effects.
Until the next distilled corn shot,
Your faithful historian,
Eric G. Prileson
Sources and Further Reads: