A few years ago the “food versus fuel” debate raged in Washington. It centred on whether the US government’s corn ethanol mandate squeezed scarce grain supplies and pushed up food prices.
It is time to revisit that debate.
Biofuels refineries have been churning out record volumes of more than 1m barrels a day of corn ethanol. The US Department of Agriculture predicts the American ethanol industry will digest 5.275bn bushels of corn this year, the most ever and 35 per cent of the domestic harvest.
Yet last week, corn dropped to $3.01 a bushel, a level last consistently seen before lawmakers enacted the mandate in 2007. Supermarkets will raise food prices less than 1 per cent this year, well below the historical average, according to the USDA. The UN’s international food price index is also lower than in 2007.
The ethanol debate raged when corn prices spiked in 2008 and again in 2012, seemingly in concert with rising biofuels volumes. Opponents of the mandate still believe it is distorting grain markets. “The requirement has created a huge demand for corn, which has dramatically increased its price,” the National Council of Chain Restaurants says on its website.
Except prices have declined instead. The simple reason is because the US is on the doorstep of a colossal corn harvest. The USDA foresees a crop totalling 15.2bn bushels this autumn, the most in history. The surplus still lying around next year is projected to total 2.4bn bushels — a figure that recalls the 1980s farm bust.
Scott Irwin, agricultural economist at the University of Illinois, says the grain market managed to absorb strong ethanol industry demand because farmers cultivated more corn acreage, corn yields have continued to march higher and growing regions have been blessed by years of beneficial weather.
The ethanol mandate has also levelled off. The law called for raising corn ethanol use from 9bn gallons in 2008 and plateau at 15bn starting last year. Even then, the White House has tweaked the mandate to require only 14.5bn gallons in 2016. There are 42 gallons in a barrel.
Yet the Renewable Fuels Association expects the industry will produce about 15.2bn gallons of ethanol this year as it profits from cheap corn and exports to countries including Canada, India and Brazil — the latter the second biggest biofuel producer after the US.
“What strikes is how ethanol production has grown just when we thought it would be flat,” says Joseph Glauber, senior research fellow at the International Food Policy Research Institute, who served as USDA’s chief economist at the dawn of the ethanol boom.
A coalition of food and oil companies, free-market think-tanks and environmental groups wants Congress to repeal the renewable fuel standard, each for its own reasons. Dave Juday, consultant to the National Chicken Council, whose members’ flocks eat corn, warns the age of plentiful chicken feed will not last.
“The bottom line is we’re only another drought, freeze or flood away from another crisis,” he says. “While corn prices may be low and the livestock industry is back to profitability right now, there’s still a big artificial demand for corn” coming from the mandate.
Geoff Cooper of the RFA, an ethanol lobby group, acknowledged that demand from the ethanol industry supports corn prices, a reason why farmers invested in new ethanol refineries. But he argues the coincident facts of $3 corn, ample food supplies and strong ethanol production “should be the final nail in the coffin of ‘food versus fuel’”.
“I don’t think there’s anybody who can argue with a straight face today that the ethanol industry is somehow a key driver of abnormal food prices, or causing high food prices,” he says.
One argument against the renewable fuels mandate is its inflexibility: the volumes are prescribed whether there is a bumper crop or a short one. The biofuel industry counters that fuel companies can purchase credits in lieu of using ethanol. Prices for these credits have soared 28 per cent in the year to August, according to Oil Price Information Service, drawing complaints from oil refiners.
The collapse of oil prices has had a two-edged effect on ethanol markets. On one hand, cheap petrol has enticed drivers back on the roads. About 10 per cent of each gallon of US gasoline is blended with ethanol, so high gasoline demand also lifts ethanol sales.
But wholesale gasoline is now cheaper than ethanol, curtailing consumption beyond what is needed to meet the mandate or follow air-quality regulations.
With tractors now gearing up for the harvest, all agree there will be plenty of corn to go around in 2016. “Extra demand from ethanol production helps corn prices,” says Bruce Babcock, economist at Iowa State university. “But the supply completely outstrips that demand.”
The “food versus fuel” debate is losing some of its venom.
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