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Food as Fuel

July 30, 2012

By Robert Bryce

This summer’s drought highlights the madness of the government’s ethanol mandates.

Every day that the drought continues garroting the American Midwest, the lunacy of turning corn into motor fuel becomes ever more obvious and ever more outrageous.

Over the past six weeks, corn prices have soared by about 50 percent. They recently hit $8.20 per bushel, an all-time high. And if drought conditions in the United States and Europe persist, prices may continue climbing. Several factors are influencing grain prices, among them the reduced amount of grain available in storage and increased meat consumption in the developing world. (Remember that most corn is used as livestock feed, not food for humans.) But there is no doubt that the corn ethanol mandates imposed by Congress are distorting the market, which will mean higher prices for everything from milk to cheeseburgers.

And yet the ethanol scam continues. Indeed, thanks to the Environmental Protection Agency, which is allowing retailers to increase the percentage of ethanol that can be mixed into gasoline, the biofuel disaster now extends from the grocery store to the service station. That could mean bad news for your lawn mower and weed whacker, which aren’t designed to run on fuel containing more than 10 percent ethanol. If all that weren’t bad enough, consider this: The United States is now exporting large quantities of corn ethanol to—wait for it—Brazil.

You don’t have to be an economist to understand why the ethanol sector is driving food prices higher. This year, about 4.3 billion bushels of corn will be converted into motor fuel, according to Bill Lapp, president of Advanced Economic Solutions, an Omaha-based commodity consulting firm. That means that nearly 37 percent of this year’s corn crop, which Lapp estimates to amount to about 11.6 billion bushels, will be diverted into ethanol production.

Compare those numbers to those of 2005, when corn was selling for just $2 per bushel. That year, 1.6 billion bushels of corn —or about 13 percent of domestic corn production—was distilled into ethanol.

By dramatically increasing the volume of ethanol that must be blended into our gasoline supplies, Congress has, in just seven years, nearly tripled the amount of corn being diverted from food production to fuel production. And with the worst drought in recent memory desiccating corn fields, those mandates are hurting consumers who are already being pummeled by stubbornly high unemployment and a weak economy.

A recent study published by a coalition of food producers, including the National Turkey Federation, National Pork Producers Council, and the National Cattlemen’s Beef Association, found that since 2007, when the ethanol mandates took effect, prices for grain-intensive foods like cereals, bakery products, meats, poultry, eggs, fats, and oils have increased at almost twice the rate of overall inflation. That study is one of at least 16 reports—published by entities ranging from Purdue University to the World Bank—which have linked the ethanol mandates to higher food costs.

This is not just about corn. Wheat and soybean prices are soaring, too. Wheat prices are directly linked to those of corn: Bakers and other wheat users have to bid up the price of wheat to keep it in relative parity to corn, because if they don’t, the entire wheat crop could be bought up and used as animal feed. As for soybean crops, Lapp says they’re suffering from the very same drought that is hammering corn.

But to fully understand why prices for meat, eggs, cheese, and other grain-intensive foods are soaring, consider this fact: America ’s corn ethanol sector now consumes about as much grain as all of this country’s livestock. Lapp estimates that this year, 4.6 billion bushels of corn will be used for livestock feed. That’s approximately equal to the 4.3 billion bushels that will be used for corn ethanol production. Thus, American motorists are now burning about as much corn in their cars as is fed to all of the country’s chickens, turkeys, cattle, pigs, and fish combined.

Need another comparison? This year, the American automobile fleet will consume about twice as much corn as is grown in the entire European Union. Put another way, the U.S. ethanol sector will burn almost as much corn as is produced by Brazil, Mexico, Argentina, and India combined.

When you look at the really big picture, the numbers are stark: This year, the United States will use about 13 percent of global corn production—that’s about 4.6 percent of all global grain production—so that it can produce a quantity of ethanol that contains the energy equivalent of about seven-tenths of 1 percent of global oil needs.

But what makes the ethanol charade even more perverse is that the entire rationale for ethanol has evaporated. For decades, the bogeyman of foreign oil has provided a handy canard that the ethanol industry could use to justify its subsidies and mandates. No longer. Foreign energy is becoming increasingly irrelevant to the United States.

Thanks to the shale revolution, U.S. natural gas production now exceeds the previous record levels that were hit back in the 1970s. Oil production from shale and other tight rock deposits has resulted in a glut of oil in some parts of the country. U.S. oil exports—which hit 2.8 million barrels per day the week of July 20—are soaring. Analysts at Citigroup are now predicting that U.S. oil production could increase by more than a third by 2015. If that happens, America could surpass both Russia and Saudi Arabia and become the world’s biggest oil producer.

Despite all this, the EPA is bending over backward to accommodate the ethanol industry, which is now producing too much fuel. Years of federal subsidies (which finally ended at the end of 2011) have resulted in a glut of ethanol production capacity, so much so that a number of ethanol plants have been idled. In addition, the United States is exporting record quantities of the fuel. Last year, the United States exported an average of 78,000 barrels of ethanol per day: nearly 9 percent of domestic production.

The primary destination for that ethanol, Brazil, is the country which has been repeatedly held up to Americans as the biofuel model we are supposed to copy. For instance, back in 2006, venture capitalist Vinod Khosla and former Senate minority leader Tom Daschle wrote an op-ed for the New York Times touting Brazil’s "energy independence miracle." They said that Brazil proves that "an aggressive strategy of investing in petroleum substitutes like ethanol can end dependence on imported oil."

It gets even more ironic. Last week, Smithfield Foods, the world’s biggest producer of pork, said that due to high domestic corn prices, it would start importing corn from Brazil! Thus, the U.S. ethanol industry is using domestic corn to make ethanol and shipping that fuel to Brazil while domestic livestock producers are importing Brazilian corn so they can produce bacon in America.

The upshot of this craziness? Frying bacon is about to get more expensive. But thanks to the EPA’s new rules allowing retailers to sell gasoline containing 15 percent ethanol, you may soon be frying the engines in your boat, car, and chainsaw, too.

Gasoline containing 10 percent ethanol, or E10, has been sold for many years. But with too much ethanol on its hands, the ethanol industry launched an intensive lobby campaign at the EPA to convince the agency to increase the permissible blend to 15 percent, or E15. The agency gave final approval to the move to E15 last month even though only about 4 percent of all the motor vehicles in the United States are designed to burn fuel containing that much ethanol.

The EPA approved the move to E15 despite strident objections from groups like the Outdoor Power Equipment Institute, which says the higher-ethanol blend fuel is "dangerous" and could damage or ruin motors used in generators, lawn mowers, and other devices. Numerous other trade groups, including the Alliance of Automobile Manufacturers and American Petroleum Institute, have also been fighting the move to E15. Toyota Motor Corporation has taken the unusual step of adding a label to the fuel caps on the new cars it sells in America. The label warns "Up to E10 gasoline only."

Last year, Peter Brabeck-Letmathe, chairman of the Swiss food giant Nestle, declared that using food crops to make biofuels was "absolute madness." He’s right. And sooner or later, if it cares one iota about consumers, Congress is going to have stop the madness.

Original Source: http://www.slate.com/articles/news_and_politics/food/2012/07/drought_and_ethanol_how_congress_mandates_and_the_epa_s_new_policy_are_hurting_americans_.html

 

 
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