Is Ethanol Still the Cause of Inflation?

On May 7, the U.S. Senate Committee on Homeland Security and Government Affairs held a hearing on fuel subsidies and their impact on food prices. Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University, was one of those invited to testify, according to The Daily World.

Largely, Babcock focused on three federal policies: the Renewable Fuels Standard, the blenders tax credit, and the tariff on imported ethanol.

The 51-cent-per-gallon blenders tax credit “is a direct subsidy given to gasoline blenders. The credit increases the willingness of blenders to buy ethanol. This increased demand increases the price of ethanol, ethanol profits, and production, the demand for corn, and the price of corn. The tax credit has greatly stimulated the growth of the industry.”

The Renewable Fuels Standard “specifies minimum biofuels consumption levels for the United States. Mandated use rises from 9 billion gallons in 2008 to 10.5 billion gallons in 2009. These mandates can be met from either domestically produced or imported biofuels.”

“Some people think that because subsidies were a key to growing the industry, if they were taken away that growth would be reversed. They don’t think about ‘fixed capitol’ — once something is built, it doesn’t just go away.

“The response has been one of education. I haven’t heard from anyone who’s disagreed with the analysis. Some Extension colleagues around the country have been sending the testimony around. One said, ‘This is what we’ve been trying to tell people, but until now haven’t had a formal model and estimates.’”

In the Mid-South, we speak about soybeans and biofuel. Similarities/differences with corn ethanol?

“If you got rid of the mandate on biodiesel — given where we think soybean oil prices will be — you won’t run biodiesel plants using only soybean oil. The price of the feedstock is just too high.

“So, if you got rid of the mandate you’d see less biodiesel produced. I think most of the mandate in the short-term — when starting at 600 million gallons of biodiesel — would be met by non-soybean oils. It would be waste grease, tallow, things like that.”

What about the new farm bill? Has Congress’ approach to ethanol changed in any fundamental way or is it the same in a different wrapper?

“It’s exactly the same with two small exceptions.

“The first exception is they’ve lowered the blender’s tax credit from 51 to 45 cents. That’ll reduce the ethanol price a little bit, but not much. And the price of corn won’t change much.

“Second, they said if you can create a gallon of biofuel from cellulosic feedstocks, we’d provide a $1 per gallon tax credit. So, they upped the ante for cellulosic biofuel.”

What you’re ultimately suggesting is everyone shouldn’t be worrying about $6 corn, but $6 gas.

“That’s right. USDA estimates that food prices have risen about 4 percent per year for the last two years. Energy prices have been a bigger contributor to that than feed/commodity prices.”

I wanted to touch on your very last sentence of testimony: “If we continue to see crude oil prices in excess of $100 per barrel, then there is little that Congress or the EPA can do in the short run to significantly reduce the price of corn short of an outright ban on producing ethanol from corn.” Has anyone on the political side been willing to even suggest something like that?

“Absolutely not — and it won’t happen. But that’s what must occur if they want to affect commodity prices: ban corn ethanol. Short of that, there’s not much you can do in the next year or two.”

View the Daily World story by clicking here.

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