Monday, February 04, 2008

Some basic truths in the ethanol debate

Although I've known this for a while, I've been looking for cohesive article that explains it. It's like someone is telling us this information but we are covering our ears and singing "la, la, la" as loud as we can, trying to ignore it.

Great article, good read!

by Arthur Foulkes
The Tribune-Star

The debate over ethanol can be confusing.

Supporters of the alternative fuel say ethanol can help America end its “addiction” to foreign oil. But critics say even if all the farmland in America were used to grow corn for making ethanol, it still would make only a small dent in annual U.S. oil consumption.

Supporters of ethanol also say it helps cut down on greenhouse gases associated with global warming. Critics say it only does so by around 13 percent while upping other pollutants, such as nitrogen and runoff into lakes and streams from fertilizers. Critics also worry ethanol will reduce water supplies as more ethanol-producing crops are grown in drier areas.

Supporters of ethanol say, too, that it is cheaper per gallon than gasoline. Critics counter that ethanol is sometimes more expensive than gasoline and, if it were not so heavily subsidized and taxed at a lower rate than gasoline, it would be more expensive than gas. Critics also note that ethanol produces less energy than gasoline, which means motorists have to fill up more often at the pump. Supporters of ethanol counter by noting that the oil industry is subsidized, too, and ethanol efficiency is improving as the industry matures.

Supporters of ethanol also note that it is a renewable energy source. But some critics say growing corn and transporting ethanol on trucks, rail cars and barges burns more fossil energy than the ethanol contains.

In short, without a huge and in-depth study, it would be hard to know the real truth about ethanol. And, whatever the study found, somebody probably would find data to dispute its conclusions.

Nevertheless, I believe there are some basic economic truths we can bring to the ethanol debate that may shed a little light into all this darkness.

First, it seems hard to doubt that more demand for corn — thanks to ethanol — has pushed up corn prices.

According to the New York Times, corn prices in 2007 were up 50 percent from 2006. And, according to a recent study by Chris Hurt, a Purdue Extension agricultural economist, corn prices in 2008 could reach historically high levels thanks to greater ethanol production.

Second, it is hard to doubt that higher corn prices have encouraged farmers to grow more corn. According to the U.S. Department of Agriculture, American farmers were expected to plant 90 million acres of corn in 2007, the most since World War II. It’s also difficult to dispute that more acres for corn means fewer acres for other crops, such as soybeans, whose production the USDA estimated to be down 11 percent in 2007 from the year before.

None of this is surprising. When the quantity of a good, such a soybeans, falls — with no change in demand — the price of the good will rise. Likewise, when demand for a good increases faster than the supply can keep up — as seems to be the case with corn — the price of that good will rise as well.

And, as supplies of other crops fall, it should be no surprise if their prices rise, as seems to be happening.

For example, steady decline in farmland devoted to growing hops has caused some beers to become more expensive, according to The Economist. “Farmers, especially in the Northwest where hops are grown, have turned to more profitable crops, like corn, which can be made into ethanol,” the magazine noted. This has forced some small or specialty brewers to shut down and forced other brewers to raise their prices.

More importantly, higher corn prices have made it more expensive for farmers to feed their livestock. The National Chicken Council recently said higher corn prices have driven up the cost of feeding chickens by 40 percent. And the U.S. Department of Agriculture, in a report published last year, said higher corn prices — thanks to ethanol production — have meant higher consumer prices for beef, pork and chicken.

Milk also costs more. A University of Illinois dairy specialist told The Associated Press that consumers should expect significantly higher milk and cheese prices because the corn used to feed dairy cattle is more expensive.

Two other facts in the ethanol saga seem hard to dispute.

First, a 54-cent-per-gallon tariff on foreign ethanol reduces supplies of cheaper Brazilian ethanol — made more efficiently from sugar cane — on the U.S. market. This artificially inflates demand for American-grown, corn-based ethanol and makes ethanol more costly for American consumers than it would be without the tariff.

Second, government subsidies and tax breaks are driving up U.S. demand for ethanol and encouraging greater domestic ethanol production. After all, when something is subsidized, you get more of it.

The science of ethanol is complex and the arguments can be bewildering. But it is hard to doubt that greater demand for corn would drive up its price, at least temporarily while suppliers rush to keep up. It’s also hard to doubt that lower supplies of alternative crops would drive up their prices.

A final fact we can bring to the ethanol debate is that highly organized and highly motivated special interests generally have a greater influence on the details of public policy than unorganized and rationally ignorant consumers. Unfortunately, the ethanol industry, as with all agribusiness — and much of U.S. business in general — is deeply involved and influenced by politics.

It should be no surprise, then, if it turns out ethanol offers highly concentrated benefits for a few special interests while faceless consumers pay the bill.

Arthur Foulkes writes a weekly column on business and economics. The Tribune-Star reporter is a Terre Haute native and longtime resident. He can be reached at (812) 231-4232 or