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Last call for ethanol?
The subsidy may go but the controversy will linger. Ethanol, made from corn, is going to face market forces without price supports by the end of this year, maybe sooner. The budget battle has made the ethanol subsidy so painful that it will almost surely be eliminated, but what a decade of growth and change for grain and livestock prices. Ethanol is a child of politics, plain and simple. President Jimmy Carter started the industry when he embargoed grain that was destined for the Soviet Union in 1979. He suggested that the corn and wheat could be turned into fuel to decrease our dependence on oil imports. The industry grew slowly for 20 years, until 1999, when Speaker of the House Newt Gingrich decided to extend and advance the ethanol price support to help Republican candidates who were campaigning in Iowa. Within a year, there were larger refineries being built and huge profits being made. Next was the loss of MTBE by the oil industry and the renewable fuel standard that required blenders to add in 10 percent ethanol as it became available. The industry expanded rapidly and last year converted 5 billion bushels of corn to produce 13 billion gallons of ethanol, enough to meet the goal of a 10 percent blend in every gallon of gasoline sold in America. With all this expansion there was an equal amount of condemnation. The first came from organizations who said that converting corn to ethanol was driving up the price of food, then livestock groups said that ethanol was driving up the cost of grain, and then California, a state that did not want to use ethanol, claimed it produced smog and was causing tropical forests to be converted to farmland. Finally, the conservative side of the Republican Party held ethanol subsidies up as "stupid," in the words of Oklahoma Sen. Tom Coburn, and the body voted against extending the tax credit. In the interim, with ethanol's demand for corn as a catalyst, the price of corn went from less than two dollars to more than eight dollars per bushel. It would seem logical that high-priced corn would be rationed and demand would be diminished. The opposite happened as exports increased, oil prices spiked and the carry-out for this year's crop is still in question and will likely see the highest price of all times paid for the few remaining bushels in August and September. Blame ethanol, credit ethanol--it doesn't matter because the mountain of cheap grain that farmers endured for decades has vanished. Even with the capability to grow over 13 billion bushels of corn this year, the marketplace is bidding the new crop over six dollars and the 2012 futures are equally strong. The oil industry looks like it has stopped the advance of ethanol at 10 percent of the total liquid fuel but the renewable fuel standard will require them to keep blending it into their gasoline. It doesn't appear that repeal of this law will gain traction as studies show that ethanol is keeping the cost of gasoline as much as 87 cents a gallon cheaper than it would be without blending. The U.S. Senate has had one vote against ethanol on a bill that won't be passed by the House, yet that seems to be enough for the industry to cut to plan B. Ethanol producer organizations are now indicating that they would favor taking the remaining 3 billion dollars that would be spent for the blender's tax credit in 2011 and shifting it to infrastructure to allow more drivers of flex fuel vehicles to have access to the fuel in years ahead. E-blending in flex fuel vehicles is the only way that ethanol consumption can expand without changing the renewable fuels standard. Millions of vehicles could use the fuel but the number of pumps is woefully short. Shifting a few billion to cost sharing on blender pump installation in strategic locations would give consumers the choice of using a lower cost fuel that has greater ethanol content. Critics say that miles per gallon will go down on the higher ethanol blends but so will price if the marketplace is competitive. Finally, there is the anger that may never subside. The oil industry fought ethanol as a motor fuel from its inception in the early 1980s. The livestock industry fought it as soon as grain prices increased and the subsidy that was once paid to them in cheap grain was paid to the oil industry to blend ethanol into gasoline. In 2012 the subsidy looks like it will end as will the tariff on imported ethanol. Will that satisfy the critics? Not a chance. Grain that is expensive, keeping profit margins thin, even at relatively high meat prices, will keep livestock interests protesting unfair treatment. Only the cattle producers who feed distillers grains will remain silent as they are doing very well if they are located within economical hauling distance of the ethanol plants. World food advocates will continue to blame ethanol for high prices in developing countries even though the cost of oil remains at 100 dollars per barrel and rapidly growing economies are bidding up exports to make sure they get their share. All of this will surely impact the 2012 farm bill as the budget cutting movement knows no boundaries. It is likely that the only remaining price support will be subsidized crop insurance. Unless a miracle fuel comes along that gains rapid market penetration, corn-based ethanol will be around for many years. After 10 years of government support the industry should be ready to ride on its own. At present it appears there are good years ahead for grain and livestock farmers with a slight rise in food prices and stability of fuel costs. Ethanol, good or bad, was a significant part of that change. Editor's note: Ken Root has been an agricultural reporter for 37 years. Root now does daily radio and television programming and is a columnist. He can be reached at kenroot@gmail.com .
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