One can describe the corn market as distorted since subsidies began under the Carter administration back in the 1980’s. Arguably, however this decade has seen the most severe distortion with the portion of the American corn crop devoted to ethanol rising to nearly 40% according to a NY Times article. Meanwhile corn prices have more than tripled since Congress first created an ethanol mandate (termed the renewable fuels standard in 2005, designed to force blenders to mix up to 10% ethanol with petrol to make automotive fuel).
We will not suggest the subsequent price increase wholly relates to corn’s use in ethanol production but it has played its part. So profitable has corn ethanol production become, that it has hit record levels this year with a surplus available for export. So why would the US continue to spend some $6bn a year in federal tax credits to a well-established and profitable industry? Thankfully, some more enlightened senators, supported by the White House, would like to see a reduction in this waste of much needed federal funds.
Although inflation as well as food inflation still appears relatively benign in the US, elsewhere in the world food inflation has become a major problem, causing social unrest and real hardship in poorer countries. Increased corn prices, and by extension livestock dependent on that corn, has contributed to the rise in agricultural commodity prices globally. Nor does it make great sense for the US to act as a major ethanol producer, as the FT points out Brazil, number two to the US, has become a more efficient producer of ethanol because it produces the fuel from high energy sugar cane rather than corn. But the US has blocked Brazilian imports of ethanol by placing a US$ 0.54/gallon import tariff.
Of course one can make the claim that diverting sugar cane to make bio fuel distorts the sugar market and indeed sugar prices have reached 30 year highs but Brazil does not subsidise ethanol from sugar cane. Although the percentage of the country’s sugarcane crop used for fuel production will increase from 54.2% last year to 68.5% by 2020 many believe this will come by way of mechanization and investment rather than clearing large amounts of land. The latter would rather undermine its eco-friendly credentials.
Having supported ethanol production in the US for three decades, we view it as positive to see the industry weaned off federal support and the market opened up as a globally traded product. From a climate change point of view ethanol has a valid role to play. The ecological case varies from place to place. Public policy must examine that case against the backdrop of the need to feed a rising global population.