The real price of ethanol

Record-high corn prices should be sending a clear message to policy makers in Washington: Requiring people to put corn-based fuel in their gas tanks is a bad idea.

Since 2005, the U.S. government has mandated that gasoline contain ethanol, almost all of it derived from corn. The policy, ostensibly aimed at reducing the country’s dependence on foreign oil and at improving the environment, has been a bonanza for farmers. Land planted with corn soared by a fourth after Congress passed the Energy Independence and Security Act of 2007, which required that gasoline producers blend 15 billion gallons of ethanol into the nation’s gasoline supply by 2015.

Now the drought of 2012, the worst in more than 50 years, is making clear the downside of a policy that leads the U.S. to devote 40% its corn harvest to fuel production. With this year’s crop expected to be the smallest in 17 years, corn prices have jumped 60% since June. The ethanol requirements are aggravating the rise in food costs and spreading it to the price of gasoline, which is up almost 40 cents a gallon since the start of July.

The damage is far-reaching. Beef and pork producers are slaughtering their stocks at a record pace to cut use of corn feed that costs two-thirds more than three months ago. This week, President Barack Obama told a campaign rally in Iowa that the federal government will buy $170 million of meat to prop up the market. U.S. cattle herds next year are forecast to be the smallest since 1952, a guarantee of more expensive food in years to come.

Ethanol production and the drought are hardly the only forces contributing to higher prices. Exports of corn to China and other countries also play a role, as do ethanol policies in Europe. And it is true that ending the ethanol mandate might cut food prices by no more than 5% at best.

Still, the drought lays bare the folly of trying to expand an industry where the economic fundamentals don’t make much sense. Based on its energy content, ethanol is roughly 50% more expensive than gasoline, and the acreage required to produce it distorts land prices.

Farmers this year planted the largest corn crop in 75 years, according to the U.S. Agriculture Department. The price of an acre of prime farmland in Iowa – the nation’s biggest corn producer – has more than doubled in the past five years, a time when other real estate prices tumbled.

Researchers at Texas A&M University have estimated that diverting corn to make ethanol forces Americans to pay $40 billion a year in higher food prices. On top of that, it costs taxpayers $1.78 in subsidies for each gallon of gasoline that corn-based ethanol replaces, according to the Congressional Budget Office.

As for the environmental virtues of ethanol, those were debunked long ago. True, gasoline-ethanol blends can lower greenhouse emissions by 20%, and ethanol can replace toxic additives such as benzene that make gasoline more combustible.

But growing corn is energy intensive. Tractors that run on diesel fuel must plow fields, plant seed, spread fertilizer and pesticides (that run into local waterways), harvest the crop and haul it to refining plants. Unlike oil, ethanol is highly corrosive and can’t be transported by pipeline. Trucks or trains must carry the finished product to gasoline blenders. By some calculations, ethanol takes more energy to produce than it yields, negating the environmental benefits.

More than 150 House members and 25 U.S. senators, as well as the director general of the United Nations Food and Agricultural Organization, have asked Obama to temporarily suspend the ethanol mandate in order to check the rise in food prices. He should listen to them, and Congress should permanently roll back the ethanol requirements.

This isn’t to say ethanol doesn’t have a place in the U.S. energy mix. Gasoline needs to be combined with agents that carry oxygen to help cars and trucks run more efficiently. Ethanol fits the bill. But the government should let the demand for ethanol obey the laws of the market, rather than the desires of the agricultural lobby.