Two years ago, the Washington Times published an opinion article that I wrote about rethinking ethanol mandates. Under provisions of the Renewable Fuel Standard (RFS) enacted in conjunction with the Energy Policy Act of 2005, refiners are required to blend ethanol into gasoline. If their product does not contain 10 percent ethanol, they must purchase credits to offset the shortfall. The RFS also addresses “renewable” fuels other than ethanol, such as biodiesel made from soybeans. This legislation was promoted by both President George W. Bush and House Speaker Nancy Pelosi.
The politics behind the legislation are quite rational, yet the outcome from both an economic and environmental perspective is utterly idiotic. There is a litany of reasons why the policy is counterproductive, but the most basic reason is that more fossil fuel energy is consumed in the production of corn and soy biofuels than is produced. Ethanol plants utilize energy equivalent to about 28 percent of their output, but much more energy is consumed in the process of growing corn and soybeans to be made into fuel.
Production of fertilizer and other agricultural chemicals consume prodigious amounts of energy. According to statistics provided by the International Energy Agency and Stanford University, worldwide fertilizer production utilizes the energy equivalent of over 1 billion barrels of oil each year. Farm tractors consume diesel fuel, as do the trucks moving corn, soy and ethanol. (Ethanol cannot generally be transported in pipelines.)
Given the fact that biofuels waste energy, there is no substance to arguments that biofuels provide energy security. Nor can a logical argument be made that they are any more renewable than the fossil fuels required for their production. The only remaining rationale for biofuels then would center on purported economic benefits — specifically propping up the farm economy. According to the USDA Economic Research Service, more than half of farm families have negative farm income and therefore require other jobs. Rural communities continue to lose population. Net farm income has stagnated and continues an inflation-adjusted downward trend — despite, and perhaps because of, biofuels.
How could our country’s political obsession with biofuels actually hurt U.S. farmers? There are roughly 70 million acres dedicated to growing corn and soybeans for fuel in the U.S. According to the National Wildlife Federation, about 7 million of these acres were converted from natural habitat. That leaves over 60 million acres that were converted from food production to grow soy for biodiesel and corn for ethanol. When U.S. farmers take 60 million acres out of food production, something has to give. Initially, commodity prices shot upward accompanied by food riots in poor countries. However, tropical countries led by Brazil soon cleared enough forest to make up for the shortage.
In Brazil, it is possible to grow two crops of corn or soybeans per year. How can our farmers compete? Brazil now exports more soybeans, corn and beef than the U.S.
Citing the China trade dispute, the administration promised an additional $15 billion in support for farmers. This amount is in addition to crop revenue insurance subsidies of $6 billion, a $1/gallon excise tax credit to biodiesel blenders, and billions more in costs associated with the “RIN” credits that biodiesel blenders and refiners with ethanol shortfalls pass along to motorists. A dollar-per-gallon RIN price translates into “stealth taxes” of $15 billion for gasoline and $2.6 billion for diesel. That’s because refiners pay penalties not only for shortfalls but also that much more for the biofuels that they do buy. (This is due to the economic concept of avoided cost.) Regulatory incentives associated with the RFS also increase the cost of corn and soybean feedstock, inflating the price of feedstock for meat and poultry.
Agricultural exports play a key role in trade negotiations with China. Early in the trade spat, the optimism of ethanol producers was high that China would enforce a 10 percent domestic ethanol mandate and provide an outlet for their ethanol. This dispute has disrupted multiple industries, including the technology sector, but it has its basis in an agricultural sector that cannot compete with Brazil. It was our preoccupation with biofuels that opened the door to food exports by other countries. Farmers are squeezed between a few vertically integrated suppliers and global commodity prices influenced by an artificial bubble of overcapacity.
Since U.S. farmers suffer from increased competition from abroad, who benefits? Politically influential biofuel producers and agricultural input producers (such as chemical companies and seed producers) do. In essence, farmers have been relegated to laundering government subsidies for these entities. The economic fortunes of farmers are tied to commodity prices that, in turn, are heavily influenced by the EPA-sponsored RIN market for biofuel shortfalls. The RIN market is very volatile as evidenced by the precipitous drop in prices triggered when the EPA granted waivers to small refiners. If there are enough RINs to meet regulatory requirements, they are theoretically worth nothing. If there are not enough, they are theoretically priceless. (Economists would characterize the demand for RINs as perfectly price inelastic.)
If the goal is to provide a living wage for farmers, a better approach would be to direct the billions of dollars spent propping up biofuels toward the Conservation Reserve Program. The CRP provides payments to farmers for planting cover crops that provide habitat for wildlife as well as restoring water quality and replenishing aquifers. From an economic perspective, the supply and demand curves for conservation lands provide a much more stable platform for food prices. If the price of cash crops rises too high, then farmers put more acreage into crops, bringing prices back down. If farmers are unable to turn a profit because of low prices, then they can fall back on CRP payments. It makes more sense to limit capacity in this fashion than it does to resort to subsidies and government mandates for surplus crops.
Jerry Jung is a retired businessman and conservationist.