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Published on October 24th, 2008 | by Nick Chambers

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Are Corn Ethanol Farm Subsidies Too Complex to Understand?

October 24th, 2008 by  
 

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.

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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.

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)


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About the Author

Not your traditional car guy.



  • LonnieB

    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.

  • LonnieB

    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.

  • LonnieB

    That should be “would NOT pretend to be..”. Sorry.

  • LonnieB

    That should be “would NOT pretend to be..”. Sorry.

  • LonnieB

    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

    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.

  • Nick Chambers

    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.”

  • Jerry

    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.

  • Jerry

    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.

  • ChuckL

    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.

  • ChuckL

    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.

  • ChuckL

    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.

  • ChuckL

    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.

  • ChuckL

    “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.

  • ChuckL

    “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.

  • Nick Chambers

    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.

  • LarsPorsena

    “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.

  • LarsPorsena

    “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.

  • Bullshark

    I saw pictures of cane harvesting in Brazil. Done by hand. A man with a machete cuts one acre per day. So a person working in the eathanol industry in Brazil can not afford to fuel a car, much less own one.

    Better to eliminate subsidies to American cane farmers and buy sugar from Haiti.

  • Bullshark

    I saw pictures of cane harvesting in Brazil. Done by hand. A man with a machete cuts one acre per day. So a person working in the eathanol industry in Brazil can not afford to fuel a car, much less own one.

    Better to eliminate subsidies to American cane farmers and buy sugar from Haiti.

  • Jay Keenan

    And if I buy the new $20,000 car on sale I’ll ‘save’ $1,000. How about I don’t buy it and save $19,000.

    So let’s do away with ethanol subsidies and save $30+ billion (whatever that total is).

  • Jay Keenan

    And if I buy the new $20,000 car on sale I’ll ‘save’ $1,000. How about I don’t buy it and save $19,000.

    So let’s do away with ethanol subsidies and save $30+ billion (whatever that total is).

  • Joe

    So if we get rid of both programs, we could save about $4.7 billion. (Get rid of even more loony ag programs, we save even more. Drop the sugar protectionism and we save the consumer a ton and keep several sugar based industries in the US, thus keeping more jobs than would be lost [which are pretty crappy.])

  • Joe

    So if we get rid of both programs, we could save about $4.7 billion. (Get rid of even more loony ag programs, we save even more. Drop the sugar protectionism and we save the consumer a ton and keep several sugar based industries in the US, thus keeping more jobs than would be lost [which are pretty crappy.])

  • WJ

    Just want to chime in here to agree with Bullshark, Jay K, and Joe. The “loan deficiency payments” should not exist at all. An artificial regulatory created “market” drives up the price of corn worldwide, making poor people pay more for food, and that is supposed to be a good thing?

    Possibly analogy, first thief wants to take my wallet and my car; second thief just wants to take my car. Did I “save” anything there according to Iowa State University?

  • WJ

    Just want to chime in here to agree with Bullshark, Jay K, and Joe. The “loan deficiency payments” should not exist at all. An artificial regulatory created “market” drives up the price of corn worldwide, making poor people pay more for food, and that is supposed to be a good thing?

    Possibly analogy, first thief wants to take my wallet and my car; second thief just wants to take my car. Did I “save” anything there according to Iowa State University?

  • Nick Chambers

    Jay, Joe, WJ,

    I like your logical thinking there, and I actually had similar thoughts while thinking about what to write in my post… but at the end of the day I believe that some subsidy of our farmers is necessary to ensure complete stability of our agricultural sector.

    Letting the free market run completely free with the agricultural sector could lead to a true world catastrophe that would make our current financial one seem like small peanuts. We can make it through an economic disaster and remain relatively unscathed in the long-run, but we’d never make it through an agricultural disaster of similar proportions.

    Plus, do you want to depend on China or any other country for our food supply?

    Just some questions for thought…

  • Joe

    There is no complete stability of the agricultural sector. In fact it’s quite volatile. While subsidies may reduce that volatility slightly, I doubt it has as big an impact as claimed. On the other hand, subsidies distort the market in several ways not to the benefit of the consumer. And let’s be honest; most these subsidies are a sham (in their candid moments, most farmers and ranchers fully admit this.)

  • Joe

    There is no complete stability of the agricultural sector. In fact it’s quite volatile. While subsidies may reduce that volatility slightly, I doubt it has as big an impact as claimed. On the other hand, subsidies distort the market in several ways not to the benefit of the consumer. And let’s be honest; most these subsidies are a sham (in their candid moments, most farmers and ranchers fully admit this.)

  • Nick Chambers

    Joe,

    I would agree that prices for commodities are quite volatile. What I was referring to was that the overall system of agricultural production in this country is held at a very stable level regardless of that volatility due almost entirely to… subsidies!

    While it’s true that subsidies distort the commodities markets both ways (holding it back when times are good and propping it up when times are bad) it is a system where these compromises have been resignedly accepted by the farmers. In boom years they will, indeed, fully admit in their candid moments that they are raking in money from subsidies that maybe they shouldn’t have gotten. But in drought years (or any other year where things don’t go that well thanks to mother nature) they sing a different tune.

    Thanks to the way the media covers it, you only hear about the money they rake in during the boom years.

    Just my humble opinion.

  • M. Elena

    Once a year (Thanksgiving time), my favorite catfish restaurant fries turkeys. This is a treat in my small town in Arkansas. Well, this year they are not frying turkeys because the corn oil is too expensive due to the “ethanol problem.” We live in the middle of pine forests which could be utilized to provide energy. Somebody with “pull” decided on corn. I’m sorry for my family – they will miss the delicious fried turkey. Too complex is an understatement.

  • M. Elena

    Once a year (Thanksgiving time), my favorite catfish restaurant fries turkeys. This is a treat in my small town in Arkansas. Well, this year they are not frying turkeys because the corn oil is too expensive due to the “ethanol problem.” We live in the middle of pine forests which could be utilized to provide energy. Somebody with “pull” decided on corn. I’m sorry for my family – they will miss the delicious fried turkey. Too complex is an understatement.

  • WJ

    Mr. Chambers:

    I am sympathetic to your point about a need for subsidies in the agriculture market and not being dependent on a hostile country for such a basic necessity as food.

    However, to slightly counter that, according to this old (2004) article http://www.bayjournal.com/article.cfm?article=2411,

    only 40% of US farmers are subsidized (don’t know whether that 40% is in number of farmers or in percentage of overall crop yields).

    My point is that there are a large amount of crops that are not subsidized AND most of the food we import comes from Mexico, Central and South America. Also, I believe we could survive without Mohair and Sugar subsidies.

  • WJ

    Mr. Chambers:

    I am sympathetic to your point about a need for subsidies in the agriculture market and not being dependent on a hostile country for such a basic necessity as food.

    However, to slightly counter that, according to this old (2004) article http://www.bayjournal.com/article.cfm?article=2411,

    only 40% of US farmers are subsidized (don’t know whether that 40% is in number of farmers or in percentage of overall crop yields).

    My point is that there are a large amount of crops that are not subsidized AND most of the food we import comes from Mexico, Central and South America. Also, I believe we could survive without Mohair and Sugar subsidies.

  • Nick Chambers

    WJ,

    Very true. The US government subsidizes many staple crops such as wheat, corn and soybean to the detriment of many others… some of which might be considered “luxury” crops (like melons, avocados, etc.) and some which could be argued are also “staple” foods in and of themselves (like pinto beans). The point being that I fully agree that our subsidy system needs an overhaul (I really don’t think we need mohair subsidies either).

    However, I do think there is a necessary place for a robust subsidy system that ensures the supply of US grown foods even in the face of catastrophe. Unfortunately, given the nature of bureaucracy, it may be impossible to provide that system without the waste that accompanies it…

  • mndasher

    Get rid of both subsidies. — Just because some one said that was the savings does not make it so. So many studies are put forth to prove a point, and most are not accurate. When ever the word ‘study’ is used it needs to looked at with a skeptical eye.

  • mndasher

    Get rid of both subsidies. — Just because some one said that was the savings does not make it so. So many studies are put forth to prove a point, and most are not accurate. When ever the word ‘study’ is used it needs to looked at with a skeptical eye.

  • Joe

    I still disagree that subsidies are needed and use New Zealand as proof that not only will agriculture survive without subsidies, but will thrive:

    http://newfarm.rodaleinstitute.org/features/0303/newzealand_subsidies.shtml

  • Joe

    I still disagree that subsidies are needed and use New Zealand as proof that not only will agriculture survive without subsidies, but will thrive:

    http://newfarm.rodaleinstitute.org/features/0303/newzealand_subsidies.shtml

  • Allen Smith

    I grew up near a dry land sugar cane farm in the arid south west. Originally the seed came from Model A sales in the early twentys!!! as most model A’s came with an ethanol still. By the 50’s they were using this dry land sugar cane for winter cattle feed. I am very excited about stepping back in time and am looking into to farming this age old seed this next year. We’ll see how it takes to a little irrigation.

  • Allen Smith

    I grew up near a dry land sugar cane farm in the arid south west. Originally the seed came from Model A sales in the early twentys!!! as most model A’s came with an ethanol still. By the 50’s they were using this dry land sugar cane for winter cattle feed. I am very excited about stepping back in time and am looking into to farming this age old seed this next year. We’ll see how it takes to a little irrigation.

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