Tuesday, January 17, 2012

Ending the Ethanol Debacle

After providing billions of dollars in ethanol subsidies over 30 years, federal lawmakers decided to halt the gravy train on December 31, 2011. It’s about time! The tax credit cost U.S. taxpayers $6 billion in 2011 alone. Congress ended the $.45/gallon blender’s tax credit and dropped the $.54/gallon tariff on ethanol imports. However, policy makers kept the Renewable Fuel Standard (RFS) , which mandates the use of bio-fuels, including ethanol.   




Currently, 40% of the U.S. corn crop is used to produce ethanol, up from 5%-6% six years ago. The increased demand created by ethanol has pushed the corn price from $2-$3/bushel to $6-$7/bushel. This price hike is good for grain farmers, but devastating for livestock farmers and food consumers. In 2011, dairy farmers faced the highest feed costs in history and more corn was used to produce ethanol than cattle feed.

Cows at our farm eating
Ethanol was touted as the answer to ending U.S. reliance on foreign oil. I’m curious why the U.S. is exporting millions of gallons of ethanol annually. Should the resources of this country, including taxpayer dollars, be spent to produce ethanol for foreign countries?

I’ve read several articles and readers comments over the last few weeks and found that I’m not the only opponent of U.S. ethanol policy.

“Ethanol is the only industry that benefits from such a triple crown of government intervention: its use is mandated by law, oil companies are paid by the federal government to use it and it is protected by tariffs. The costs of ethanol subsidies and tariffs far outweigh the benefits.” U.S. Senator Diane Feinstein (D-CA).

“The increasing demand for corn for ethanol production has contributed to higher corn prices. Which has created additional income for corn producers but also appears to have increased costs to meat and poultry producers, big food companies, grocery shoppers and federal food programs.” The Government Accountability Office

See my earlier blog Al Gore Confirms what Dairy Farmers Know - U.S. Corn Ethanol is Not Good Policy.    

It seems the support for U.S. ethanol policy and subsidies has diminished greatly over the last few years. The few backers appear to be grain farmers, companies who sell products and services to grain farmers, the corn industry, ethanol processors and the Congressman and Senators who voted for it – all who reap financial gain.

My family dairy farm is competing with well-funded and heavily subsidized ethanol plants to purchase corn to feed our cows. Dairy, livestock and poultry farmers are disadvantaged because we can’t compete. The high price of corn has driven up the price of soybeans, hay and other feedstuffs. As a result, many farms have suffered financially and some have gone out of business. I wonder if Congress considered how ethanol policy would impact livestock and poultry farmers?

I do all the grocery shopping for our family and see the increased price of many food items. Ethanol has contributed to the escalating cost of human food as well. It’s not the only cause, but has played a significant role. Did Congress think about how ethanol policy would affect food prices?

This graph illustrates the uses of U.S. corn from 2001 to 2011. Exports have been consistent and corn used for feed has decreased. The glaring change over the last 10 years is the increase in corn used for fuel/ethanol.

The government should eliminate ALL ethanol mandates too. If ethanol is such a great product, certainly it should be able to stand on its own. 
 

16 comments:

  1. Interesting that someone so close to ag doesn't think about history when talking of benefits from taxpayers. Dairy farmers, and every other consumer of corn, benefited for decades from taxpayers when corn prices were below production cost in the form of farm subsidies. Now, corn is actually profitable, and livestock cries. Compound that with the offset of your 40% usage quote with that of distillers grains and things change quickly. Exports are not subsidized, never have been. The ethanol subsidy (Volumetric Ethanol Excise Tax Credit or VEETC), was a blender's credit. Exports are not blended before being shipped out of the country, therefore no taxpayer money.

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  2. Distillers grains (DG) are a great feed for dairy cattle, however there is a limit to the quantity cows can eat so it’s not the same as grain corn. The reason we must limit the use of DG is because it’s high in vomotoxin, which is a type of fungi commonly found in grain by-products. If cows consume too much DG, they get sick.

    All ethanol production has been subsidized from day one when federal and state governments provided funding for the construction of many ethanol processing facilities in the U.S. It's far from a sustainable business structure. Regarding the blending of ethanol prior to it being exported, I found differing opinions. The VEETC only applies when ethanol is blended with gasoline, so it would apply to exports of gasoline/ethanol fuel blends.

    The biggest question is whether ethanol production can stand on its own or does it need to be propped up by government subsidies, tariffs and mandates? If it’s a stand-alone business, then capitalism will work. Prices for goods and services will adjust accordingly for the demand that exists. Ethanol is not operating in a business model that is purely competitive. Therefore, you lose efficiency, innovation and competitiveness.

    I believe in capitalism and small government. Don’t you?

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  3. As a dairy farmer, you also reap the benefits of government subsidies. How is it any different when crop farmers get ethanol subsidized and dairy farmers get milk subsidized?

    For a so-called environmentalist, Al Gore has some pretty screwy ideas on how to relieve our dependence on fossil fuel and foreign oil.

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  4. Without the subsidy, oil companies will just collude to keep the price of gas low enough that ethanol can't compete, and that will be the end of our efforts to be become more energy-independent. As far as the impact on feed prices, which I'm sure is the real reason a lot of dairy farmers don't like it, then you're out of luck regardless of what happens with the ethanol tax credit, because corn demand is going to keep going up no matter what. Actually, a bigger factor than ethanol, this year, could be the shortage of corn seed. Less corn planted means a smaller harvest and higher prices next harvest season.

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  5. Thank you for the comments. I've responded to each below.

    The only way dairy subsidies could match corn subsidies is if the government created a product which used 40% of the U.S. milk supply, then funded the building of dairy processing plants to manufacture this product, then forced American’s to purchase it and placed tariffs on all other similar dairy products coming into the U.S. Currently, dairy farmers receive very little from the U.S government. When the milk price is extremely low, we receive a support payment for up to 2.9 million pounds of milk/year. Most years, dairy farmers receive no subsidies.

    You are correct that demand for corn will continue because the federal government continues to mandate its use. If those mandates (just another term for subsidy) ended, you would see a major drop in the demand for corn. The largest factor of inflated corn price is ethanol because such a large percentage of U.S. corn is going into ethanol. I don’t have a problem with ethanol production if the government would have stayed out of the mix. But it’s unfair to subsidize one industry so much and in the process practically bankrupt livestock operations who have to complete for this high-priced, heavily subsidized commodity.

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  6. I enjoy a good debate so here goes. I am a farmer, and half of our crop is corn each year, so I'm not complaining about the higher prices. But ethanol isn't what is driving the price up. 10 years ago we had two dollar corn, wasn't the subsidy in place for 20 years already? Hmmmmm, weird logic.

    The subsidy was put in place to promote ethanol production in the US, and try to keep away from importing foreign oil. Now they're dropping tariffs on imported ethanol. Wow, you guys who think that food prices will drop are just fooling yourselves. I'm pretty sure (and just to pick a name) Kelloggs corn based cereal isn't going to drop in price because they want to give the consumer a break...riiiiiiiiiiiiiiiiiiiiiiiiiiight. Because that's how they got rich, by doing things like that /sarcasm.

    If anything, prices will go up for food, and certainly for gas. All they did was cut a small subsidy that taxpayers won't notice anyway. That's right, taxes won't go down either. It's just a thing that happened to try to make themselves look like they're cutting spending. Nobody will notice any difference other than higher gas prices. Also, if you see corn based food prices drop, rest assured that the amount in the package is down as well.

    My wife is a lab manager at an ethanol plant, her friend is production manager, my two best friends who are brothers are shareholders in 4 local plants, I have shares in one, I sit next to the Director of operations of a plant at the local college basketball games, and they all just laugh when people say it's going to end up closing ethanol plants....literally laugh. They didn't see one penny of that subsidy, and if the middle men raise the cost to cover their losses, it will be passed on to the consumer. If the middle men try to pass on some to the plants, then they will just raise the cost of DDG and wet cake, which by the way they are shipping to Brazil. Hmmmmm strange how that country keeps popping up.

    Just thought I would point out some misconceptions that people have.

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  7. Thanks for your comments. You claim that ethanol isn’t increasing the price of corn – but the numbers tell a different story. I’ve added a graph to my blog that illustrates the use of corn over the last 10 years. As you can see, exports have been consistent and corn used for feed has decreased. The big change is the amount of corn used for ethanol. The amount of corn used for ethanol really started picking up around 2006 when the federal Renewable Fuel Standard Program was signed. This program encouraged the blending of renewable fuels and predicted it would double the use of ethanol and biodiesel by 2012. In 2007, the Energy Independence and Security Act was signed requiring the use of 15 billion gallons of renewable (ethanol) fuel by 2015. During 2007-2008 many states started mandating the use of 10% ethanol in E10 fuel.

    The state and federal government helped fund the construction of many ethanol plants across this nation and they mandated ethanol be used. These are subsidies! Those who grow corn, work at ethanol plants and are shareholders in ethanol plants benefit from these government subsidies/mandates.

    Unfortunately you are correct, ethanol production isn’t going away anytime soon. The ethanol monster has been created, heavily funded and mandated by state and federal government. If the mandates continue, ethanol will continue.

    I agree that retail food prices are quick to go up and very slow to come down when raw product prices decrease. As a dairy producer and the person who does all the grocery shopping for our family, I see dairy product prices increase rapidly when we are paid more for our milk, but don’t come down near as quickly, or at all, when the price we’re paid decreases.

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    Replies
    1. I understand your concerns, but in my opinion based on information I get from people I know, I have my own opinions.

      I understand that the dairy industry is hurting, and I feel for you, I just don't think that it's entirely based on ethanol. It just seemed that was what you were saying, if I misunderstood, I apologize. I also came away as very brash, I apologize for that as well. I had just been debating the ethanol subsidy with someone and was, well lets just say irritated, and I started to look for information and I ran across your site. Then it was venting time. Just needed to let it out. There's the third apology :)

      Go to glaciallakesenergy.com, locations, pick Mina, then staff, and email addresses are available for everybody for any questions you might have. Now don't mention my name, because my wife who is on the staff page would smack me upside the head lol.

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    2. Marc, I appreciate you coming back to my blog to reply. I realize ethanol is a controversial topic in the agriculture industry. So when I write about it I expect a spirited debate. My intention is not to blame ethanol for all the problems, but it has had a huge impact on the price we pay for feed. Since feed is about half of our operating cost, when the price goes up it really hurts our business. It would be nice if both grain and dairy farmers could prosper in a market place without government intervention. I wish you and your family well.

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  8. I get the feed costs, as we have cattle as well. Not dairy cows, just for beef. It just seems that a big deal of the cutting of the subsidy is being used as more of a political tool than anything else.

    I also wish you and yours well.

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  9. I have two thoughts on this.

    1) If ethanol isn't driving up the price then the grain producer should have no concern for the existance of the ethanol industry. To say an end user isn't effecting the price just doesn't seem to make sense to me.

    2) In my memory, EPA's most recent announcement of the 2012 renewable fuel standards (RFS) quotas didn't contain a word about the environment.( sorry I don't have the link) It was all economic analysis. Someone at EPA is deciding where 40% of the corn in this country goes with a quota. What/who do we contact to find out how they will change the quotas in event of war, drought, flood, etc.. It is bad enough that USDA fiddles with the grain market. Adding EPA to the equation makes it even worse.

    Thanks for your time.

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  10. Chuck, thank you for your insight on this issue. EPA has more power than most people realize. In fact, the government has far too much control in most sectors.

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  11. Overall I have to agree with you. It's time for ethanol to stand on it's own and I too was glad to see the tax credit go. I've only been a full time farmer for 3 years and I've sold corn from $3.12 up to nearly $8.00 and now we seem to be hovering in the $6.00-$6.50 range. I guess we'll see if we really plant 96M acres and how those acres yield. I don't doubt that ethanol has an effect on corn prices, but I don't think it's the only reason. Developing countries are demanding more, China is importing instead of exporting like they used to and those things have a big affect on carryover stocks year to year. Low carryover has driven prices up. We really need a nice above average year of yield. And let's not forget DDGS being used as livestock feed. As much as 30% of grain that goes to an ethanol plant leaves as feed. Maybe you can help me with a cost analysis of DDGS to others feeds. Here's a bit more on my perspective if anyone is interested. http://bit.ly/dGmha4

    I wouldn't mind $4-5 corn if I was raising 200bu every year.

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  12. I realize the U.S. exports corn which contributes to the price. As you can see from the graph above, the amount of corn exported hasn't changed much over the last 10 years. The glaring change in corn use is ethanol. Livestock can consume DDGs in limited amounts, but it's not the same as grain corn as I explained in a comment above. I agree that $4-$5 corn would be more reasonable. I hope to see this soon becuase $7 corn is killing the dairy industry in ths country.

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  13. Hello, Dairy Mom,
    Interesting conversation. I, too, am a member of a dairy farming family that has been scorched by the hyperinflation in our purchased feed bill due to ethanol. It has been a terrible suffering for us just trying to keep up with all the bills and having so much cash flow go into the feed bill, even with the higher prices we were getting for our milk over the past year. "Were"---past tense, since the CME traders have succeeded once again in crashing dairy farmers' milk checks with their self-serving "activities" lately. I wish the best to the grain farmers who used to have to endure low prices, but I need to be able to compete in a free, open, transparent market for that limited amount of grain to feed my cattle, who are, by the way, among the traditional users of grain, along with other livestock, and, yes, humans, too. If I could "compete" for that grain against ethanol, everyone would be shocked by just how high the grain prices would go, and then everybody would be screaming, "hyperinflation," for sure! But that is not possible for dairy farmers because of the totally irrational way raw milk prices have been determined since 1981, when the parity system was deemed unacceptable by the DC "free trade" policymakers.
    My costs to produce raw milk are not even factored in the federal minimum price I receive for my farm milk thanks to the pricing changes that came in under the feds' outrageous "Order Reform" in 2000, again because of another federal push to "globalize" dairy farmers' milk prices. The federal minimum milk pricing formula is an atrocious joke with pitiful trading "activity" on the CME determining the dairy farmers' milk price at the farm with no consideration for the real costs needed to produce raw milk (grain costs included). The formula that determines the federal minimum price for farm milk needs to be corrected. If it is not fixed, then more dairy farmers will "exit the business," forced out like all their brother and sister dairymen over the past 31 years because of milk prices paid too far below "cost of production." The only proposal that will fix this pricing mess is S-1640, "The Federal Milk Marketing Improvement Act" (the Casey Bill). If that Bill does not get passed(and why would we expect our "globalized" federal elected officials to support policies that would benefit American dairy farmers and consumers), then dairy farmers better force their dairy cooperatives to set a fair raw milk price (to cover the real business costs needed to produce the milk---like grain!) that the processor-buyers would have to pay if they want to procure the milk. It is because the dairy farmers' costs are not factored into the basic farm milk price that we can't "afford" to compete for the high-priced ethanol grain. Dairy farmers need to get their milk-pricing house in order like any other business has to do. Set the price, dairy cooperatives!
    By the way, your blog and your dairy farm are wonderful, both "beautiful to behold"---great job! You're doing a great service for all of us getting these vital messages out for education and discussion!

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  14. I appreciate and relate to your comments. I support S 1640 and hope someday dairy producers will receive an equitable distribution of the retail milk dollar. In order to have dairy products, we must have dairy producers who can sustain their farm long-term. This can only happen if dairy producers are consistently profitable.

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Thank you for reading my blog and taking the time to comment! I’m opening the doors of our farm to share with you and enjoy engaging in discussion. Please be respectful in your comments. I reserve the right to remove posts that include name calling, slander, and vulgar language or contain links to websites that assault animal agriculture.

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