Are Corn Ethanol Farm Subsidies Too Complex to Understand?
Several bits of news trickled out this week that, when put together, indicate great confusion even among experts about whether or not corn ethanol government subsidies are helping or hurting.
To start with, researchers at Iowa State University have found that, even though $1.3 billion was given to the corn ethanol farming industry in the form of subsidies in 2007, the government saved $3.45 billion on what are called loan deficiency payments as a direct result of these ethanol subsidies.
Loan deficiency payments were established in 1985 as a way to ensure farmers’ incomes remained steady even when prices for commodities such as corn were abnormally low. Since 1998 the loan deficiency payment program has cost taxpayers more than $29 billion.
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After adding all the pluses and minuses together (including the two factors mentioned above), the Iowa State researchers concluded that ethanol subsidies have had the effect of lowering overall farm subsidies by $2.65 billion in 2007. That’s a chunky bit of savings for the US taxpayer.
On the heels of these research results, the UK Financial Times has released a multi-part series detailing how the US corn ethanol boom and subsequent bust is fully attributable to government subsidies that inflated demand for a product against natural market pressures.
According the the Financial Times, billions of taxpayer dollars were used to subsidize the corn ethanol industry. Early investors, including people like Bill Gates, have lost billions more because the self-same subsidies that were supposed to spawn an industry have ended up killing it.
So which is it? Are US taxpayers losing money to ethanol investment, or are we saving money on other fronts that make up for the losses and perhaps even provide a surplus? Has the system of corn ethanol subsidies gotten too large and bureaucratic for even the experts to understand at this point?
In my mind the issue is much bigger than simply who is and isn’t losing money. There are a myriad of other nuances involved in the valuation of biofuels including worry over food prices, energy independence, and environmentalism, to name but a few.
Like I’ve said before, and as the Financial Times concurs, the biofuel genie is out of the bottle and there’s probably no putting it back at this point. So now the question becomes: if it’s broken can we fix it?
Image Credit: dogfrog’s Flickr photostream. Used under a Creative Commons license
Sources: The Farm Gate (via Biofuels Digest), and The Financial Times (via Biofuels Digest)
I am certainly no economist and would pretend to be, but the term “government subsidy” just smacks of socialism. It seems to fly in the face of free market capitalism. I’m sure someone her can refute that, though.
My semi-informed opinion is that they should be done away with, except perhaps to help farmers re-tool for other ethanol crops, invest in “celluline” technology and to help build ethanol plants. I suppose that can be seen as a contradiction, but I mean a one time investment, not an ongoing safety net.
Corn is the main feedstock for ethanol because it’s what is most easily grown, harvested and transported by the farmers today.
I know for a fact that Jerusalem artichokes grow wild in the cornbelt and require a fraction of the water resources that corn does. It also yeilds much more ethanol per acre than corn and is naturally bug and disease resistant. With current ethanol technology, only the root, or tuber, can be used (still better than corn), but when “celluline” technology come on line, the entire plant can be used.
But the farmers would have to replace, or add the machinery to grow and harvest it. That’s where any subsidy could, would or should be directed toward. Not corn.
This would also take pressure off the food vs. fuel dilemma.
Again, just my lay opinion. I welcome any more knowledgeble critique of this viewpoint.
That should be “would NOT pretend to be..”. Sorry.
Nick,
I just read a facinating article on EnergyBulletin.net entitled “Ethanol from Brazil and the U.S.A” by Milton Maciel, an “organic sugar cane farmer and ethanol expert in Brazil”.
Since ethanol subsidies and tariffs seem to be joined at the hip, politically speaking, I think it’s an article worth reading, if only to get a clearer picture of how, even if tariffs are lifted, Brazil doesn’t produce enough ethanol to seriously undercut the American farmer.
Given the data in the article, it’s my conclusion that if the ethanol subsidies in this country are to continue, they should go to help the sugar cane farmers in the southern states more than the corn farmers of the midwest. Sugar cane is a much more efficient source of ethanol, but the U.S. doesn’t grow enough of it to supplant corn as the main source.
If we partnered with places like the Dominican Republic, that could change.
Just a thought.
The article is at http://www.energybulletin.net/node/21064 if you are interested in reading it.
LonnieB,
Interesting points. I agree that if we’re going to “level the playing fields” it would be better to subsidize directly competing crops (i.e. sugar cane farmers in the US vs sugar cane farmers in Brazil). I get the sinking feeling though that nobody in our government actually knows what the hell is going on with our various and dislocated subsidies right now to be able to change them in an appropriate way. It’s like we need to just have a “do over.”
Hi guys, Like Lonnie, I don’t pretend to be an expert, but from my readings I think we have a better chance of creating sustainable, replenishable fuels from Algae and Jatropha.
I think if we spent half of our Ethanol subsidy money on R&D of Biofuels like FAME (Biodiesel) we’d be farther ahead. Just the process of using our food/feed crop for fuel seems crazy.
The problem with Government subsidies to promote any product is that politicians subsidize favorite ideas or contributors’ ideas which may not be economically viable and will lock us into continuing subsidies for something that does not do what it should do or will actually make it impossible for a better idea to prevail.
The correct way to do this is to replace subsidies with 5 year moratoriums on business income taxes. In this way, the tax that is not paid becomes the subsidy that we do not supply, but which is effective in having an entrepreneur or a group of them select a product to meet both a need and which is a viable business model with a good potential for a profit which will eventually result in tax revenues and will not require government backing.
Effectively a tax moratorium is a self funding subsidy that places no obligation on the government to continue spending money in support.
Disclaimer. I am a Conservative, not a Liberal.
Addendum
With businesses competing with other businesses, we will get more ideas tried and none will be in competition with the unlimited funds that government can use. The consumer will pick the winner instead of the government declaring a winner before the game starts.
“After adding all the pluses and minuses together (including the two factors mentioned above), the Iowa State researchers concluded that ethanol subsidies have had the effect of lowering overall farm subsidies by $2.65 billion in 2007. That’s a chunky bit of savings for the US taxpayer.”
Inadequate information is provided for the conclusion. Needed information is the size of the ethanol subsidies. If they were $2.65 billion, then we broke even.
Chuck man,
First paragraph:
“even though $1.3 billion was given to the corn ethanol farming industry in the form of subsidies in 2007, the government saved $3.45 billion on what are called loan deficiency payments as a direct result of these ethanol subsidies.”
These numbers are taken directly from the Iowa researchers’ conclusions, not my own.
“even though $1.3 billion was given to the corn ethanol farming industry in the form of subsidies in 2007, the government saved $3.45 billion on what are called loan deficiency payments as a direct result of these ethanol subsidies.”
…that’s nice but it don’t mean squat at the grocery or gas pump store for the average consumer.