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Editorial: Ethanol mandate

Wednesday, August 22, 2012

For much of the summer the country's midsection has dealt with a significant drought, deemed worst for the U.S. in decades. In Missouri the drought has been especially hard hitting, as 95 percent of the state is considered to be in extreme drought or worse.

The drought has led to a number of issues, including cracks in basements and withering gardens. Many in the agriculture industry have also dealt with challenges, as will consumers through rising food prices.

Though many farmers in Southeast Missouri were expected to have some of the best corn yields in the country this year, this is primarily due to accessible irrigation. For other farmers, the drought has led to much lower yields. In fact, it's expected the average yield will be 123 bushels per acre -- the lowest in the last 17 years. With these poor yields, the price of corn has climbed to more than $8 a bushel.

Corn is a key ingredient in many products and is used as feed for livestock. Because of the Renewable Fuel Standard, signed into law in 2005 and expanded in 2007, it's also used in gas blends. This year the law will lead to the production of 13.2 billion gallons of corn starch-derived biofuel.

According to a recent story from The Associated Press, 40 percent of the corn crop in the U.S. goes to ethanol producers while 36 goes for feed. This breakdown, combined with lower yields due to the drought, has led some to call on the EPA administrator to issue a waiver that would reduce ethanol production targets.

We support the exploration of alternative fuels, as well as other policies that could potentially lead to lower gas prices and a cleaner environment. But there's a good argument to be made that not only should waivers be issued this year, but that the federal government should not be in the business of mandating the ethanol blend.

As we've seen in numerous other examples of government picking winners and losers, the ethanol mandate comes with its own set of unintended consequences.

A report by James M. Griffin and Mauricio Cifuentes Soto from The Mosbacher Institute at Texas A&M University suggests the mandates have had a significant effect on food prices while providing minimal relief to consumers at the pump. When you consider the escalating mandates for ethanol, it's all the more concerning.

Maybe ethanol has a role to play in the U.S. energy market, but the federal government's increasing mandates for it are short sighted -- particularly now. The U.S. continues to face many economic challenges, and this summer's drought has not helped. Contributing to these challenges via burdensome EPA mandates on fuel blends would be imprudent going forward.

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Here are some other points: First, a correction - When you consider the high protein feed that is a by-product of ethanol production (and highly valued by livestock producers), only about 28% of the corn crop is used in the production of ethanol, not 40%. (I don't know what it will take to educate the Associated Press on this issue - they appear to have an agenda) Second, the mandate is not the driving force of ethanol use. Blenders have used over 2.5 billion gallons of ethanol beyond what is required by the mandate. The reason is that ethanol doesn't just replace gas - it also replaces gasoline octane enhancers and oxygenates that cost much more than base gasoline. Economics are driving the use of ethanol, not the mandate. In fact, if the mandate is waived, there will likely be very little, if any drop in ethanol use. The report quoted blaming ethanol for food price inflation is only one outlier out of many that prove it has had only a small effect - including one from the United Nations.

This drought is a disaster for all of us. My heart bleeds for the livestock people that are selling their herds. It also bleeds for corn farmers that sold corn contracts for $5/bushel just a few months ago and now have no corn to deliver against those contracts and will be buying $8 corn to fulfill their earlier sales. Others need the higher price to compensate for drastically reduced yields. Some have insurance, some do not. (It's also too bad many of those livestock producers weren't the ones buying that cheap $5 corn)

The EPA may issue a waiver. It will depend on what their economic analysis uncovers. If they do, so be it. EPA is being put in a challenging position. They can't make the devastation of the drought go away. They can only determine who and how to distribute the pain. Many food groups are using the drought as an excuse to increase their profits. The price of beef will go up, but for now, it should be decreasing as producers liquidate their herds, as much from lack of forage and water as for the price of corn.

-- Posted by Mike500 on Thu, Aug 23, 2012, at 10:55 AM

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