The Real Con: It’s People, not Policy!

The opinion pages have been overflowing lately with armchair authors who tout the “easy” correlation between ethanol’s rise and increasing food prices.  They fail to do their homework.  Food and energy price inflation is the direct result of lifting hundreds of millions out of poverty in Asia and elsewhere through globalization.  Rising living standards promote richer, more protein-intensive diets, along with the transition from bicycles to motorised transport, driving up global costs of energy/grains. 

Steven Rattner’s latest article in the NY Times, “The Great Corn Con,” stated that ethanol is “a gasoline substitute that imperceptibly nicks our energy problem.”  The quote is an incredible understatement; ethanol now comprises 10% of all gasoline sold in the United States.  While 10% doesn’t sound overwhelming, a 3% reduction in world crude oil exports due to disruptions in Libya helped prompt a 30% rally in Brent Crude Oil prices.  By a similar metric, if ethanol were to disappear tomorrow, $5 per gallon retail gasoline would not be out of the question.  A study by Iowa State University estimates ethanol saved US consumers 89 cents per gallon in 2010, putting $800 in the pocket of an average American consumer.  Note also the “farm value” of foodstuffs accounts for only 19.5% of food prices, which is nearly equal to the 15.5% for energy costs (incl. packaging and transportation).

The real scoop on inflation is China’s insatiable appetite for raw commodities.  China’s annual soybean imports have increased 500% in the last decade to 58 million metric tons.  The Chinese buy two-thirds of the world’s soybean exports.  They need the beans to feed their growing domestic hog herd, which are nearing 1.2 billion, up 25% since 2000.  A 1.2 billion hog herd is still not enough to feed the masses, as they are still forced to import pork products.  US pork export trade has increased from virtually zero in the early 90’s to 2.1 million metric tons today.

Meanwhile, ethanol’s share of corn consumption is often over-stated.  Ethanol plants grind 40% of US corn production, but 30% of that corn is returned to livestock producers as the value-added feed product distiller grain.  Therefore, ethanol’s direct share of corn consumption is 28%.  Mr. Rattner also asserts that the import tariff on Brazilian ethanol “successfully shut off cheap imports,” which is blatantly untrue.  The import tariff prevents importers from taking advantage of the 45 cent/gal blender’s credit, which is paid to the end-user of ethanol, not ethanol producers themselves.  Brazil has faced ethanol production shortfalls for two consecutive years, and was forced to import 60 million gallons of the “less efficient” US corn ethanol this winter.  Brazil’s shortages are structural; more are driving cars that run on 95% ethanol, and highlights the dangers of relying on other nations to fill our energy needs.  Ethanol has helped reduce the burgeoning US trade deficit by 7%, mostly by displacing crude oil imports.

Ethanol has its warts, but much like gasoline and natural gas, the positives must be weighed against the negatives.  The environmental benefits and energy balance calculations of ethanol are contentious, and often rely on studies that are well over a decade old.  Over that decade, the ethanol industry has improved their corn conversion efficiencies by at least 10%, and cut water use by 22%.  Today, ethanol water use compares favourably to the 2-2.5 gallons necessary to refine crude oil into gasoline.  Technologies are in development to further improve ethanol efficiencies.  In fact, with the world having to pump heavier crude oil varieties to meet growing demand, ethanol’s energy and water balances should improve even more relative to petroleum. 

Since 2008, ethanol has served as a convenient scapegoat for those with an axe to grind, or the lazy.  Inflation is an inevitable response to improving lifestyles around the world – too many people chasing too few resources.  This structural change means the average US citizen will have to pay more for food and energy until technology can catch up with rising demand.  Ethanol has been proven to reduce the costs of the latter, and should be part of a comprehensive, diversified US energy policy.  Studies estimate that ethanol added over 400,000 jobs to US payrolls over the last 10 years – one of the few to boast gains during the Great Recession. The American food system is still the envy of the world, paying less as a share of disposable income than any other country on the planet.  Would you rather the extra money go to support American producers, as they grapple with ever-higher input costs?  Or big oil executives and OPEC?  In the end, we all have a choice – make sure you examine the facts, not the rhetoric, before making yours.

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