by Chas Bonner
There was a recent article in Oil Price Newsletter entitled “U.S. Ethanol Policy Contradicting Every Principle of Sound Economics,” dated 1/17/11. While some might view it as inflammatory, if all facts are true, it is difficult to argue with the premise. Furthermore, there might be a message for all of us in farming.
In the recent tax revision bill, there was a little-noticed extension of the ethanol subsidy of $.45 per gallon. At the same time, the tariff against foreign producers of $.54 per gallon, which was due to expire at the end of 2010, was extended.
The science and understanding of ethanol-based fuel production is sound. The output of energy from food sources is far inferior to that of petroleum sources, and corn sourced ethanol inferior to sugar cane based ethanol. Plus the cost of extraction of that energy from corn is high. In addition to direct costs, the Oil Price article further compares “opportunity costs” of petroleum based energy vs. corn based energy---for instance, the cost of pollution, cost of transport, cost of national security as a result of depending upon foreign suppliers, higher cost of food as a result of using food in fuel, and many more. In the article, it appears that the opportunity costs of ethanol are prohibitive, and it has been proven before that without subsidies and tariff protection, the industry would die. In fact, many of the ethanol producers who built plants 5-10 years ago are now in bankruptcy.
Because the net energy produced by sugar cane based ethanol from Brazil is much higher than that from corn, and because the U.S. is having a tougher time supporting subsidies, it is safe to assume that in a matter of time, subsidies will evaporate, tariffs will be suspended, and corn will no longer be needed for fuel, driving corn prices down---a disaster for grain farmers and blessing for cattle, hog, and dairy farmers.
We would never speculate on when this might happen, but the economics are strongly behind a change in policy, and now the politics are moving in that direction, especially with the price of food around the globe escalating dramatically.
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