Mandates for corn-based ethanol are pushing inflation in the U.S. economy

By Mike Kasten

Have you sat down and consumed your 5.12 pounds of corn today? That, according to USDA figures, will be the daily per-capita consumption of corn for 2008 in the U.S.

Several people in recent columns have stated that there is only pennies' worth of corn in a box of cereal or other foods you buy. This is true but misleading. How many of you eat 5.12 pounds of corn flakes or cornbread per day? You don't, you consume it through thousands of products you use every day, such as eggs (feed for chickens), milk (feed for dairy cows), meats, plastic, soft drinks and 1.82 pounds for ethanol. Corn and the price of corn are extremely important to your daily lives.

A little over a year ago I wrote a letter published in the Southeast Missourian posing this question: If ethanol is such a good idea, why does it take billions of dollars in tax incentives to build plants, a 51-cent-per-gallon blending fee, a 50-cent-per-gallon tariff on imported ethanol and federal and state forced consumption to make it a viable business? I call the blending fee, tariff and forced consumption the golden triangle of ethanol. Why? Because, without all three, the corn-based ethanol industry would not exist.

Corn-based ethanol is not a new idea. It has been around since the early 1970s. The blending fee and tariff protection have also been around for a long time. When corn was selling for well under $2 a bushel, the ethanol industry was struggling. Government-forced consumption finally put ethanol on the road to success.

I bring this up now because there is a new proposal that would mandate consumption of biodiesel. I think biodiesel is actually a good product because, unlike corn-based ethanol, it can be made from waste products that have little value. I am -- and I think we can safely assume that our Founding Fathers would be, adamantly opposed to government-forced consumption of any product, including biodiesel. This is a philosophical debate that should have taken place long before passage of the energy bill. Government-forced consumption under the pretense of saving the environment is a slippery slope. In my wildest dreams, I never thought the conservative people in agriculture would be the ones to push us over that slope.

The two mantras that the corn-based ethanol defenders use the most are that ethanol reduces our dependence on foreign oil and the blending fee goes to the oil companies. I would like to address both of these.

If it takes 1 gallon of fuel to produce 1.5 gallons of ethanol and we, by law, must use 15 billion gallons of ethanol, it will take 10 billion gallons of fuel to produce the mandated amount. The 1.5-1 ratio is certainly on the high end. Some estimates put this at a negative number. This would give us a net gain of 5 billion gallons. Have you checked your mileage lately? If you factor in the loss in mileage (2 to 6 percent) and the blending fee for 15 billion gallons ($7.65 billion dollars per year) and billions in tax credits and incentives to build the plants, the net energy gained is minimal, if at all, and very expensive.

To say ethanol reduces our dependence on foreign oil is a real stretch. You must also factor in (according to USDA numbers) that in 2006 we imported 62 percent of all nitrogen fertilizer and 88 percent of all potash, two of the main three fertilizers needed to produce corn. In 2007 we imported 27 percent more nitrogen and 15 percent more potash than in 2006. So, are we not now making ourselves more dependent on foreign fertilizer to produce the ethanol so we can be depend less on foreign oil?

One common thread in the defense of the corn-based ethanol argument is that the 51 cent blending fee goes to the much vilified oil companies not the farmers. The implication in this argument is that the farmer doesn't benefit from the blending fee. If that is the case, then why are we going to send $7.65 billion per year to the oil companies for using ethanol? Why aren't the corn growers and Farm Bureau calling for the immediate end to blending fees? The simple answer: Without all three points in the golden triangle of corn-based ethanol, the industry goes out of business overnight.

The irony of the golden triangle is that it has now driven the price of corn so high that even with all three points of the triangle in place we can no longer afford to build the plants and make the ethanol that is mandated. It is just too inefficient and expensive.

I know that a lot of factors -- energy costs, increased world demand and the exports driven by the cheaper dollar -- play a big part in the higher commodity prices. The U.S. is now, according to the USDA, exporting 66 percent of all the corn exported in the world. We are also, at the current rate, on track to export almost 4.5 billion bushels of corn this year. That would be one-third of our total crop. To have countries coming to the U.S. to buy corn at a good price is a positive position to be in and something we must continue to cultivate. It does, however, cause one to ask some questions. Why do we continue to have an ethanol policy that supports a nonviable business and mandates the use of a product that achieves none of its goals? Why do we continue to create an artificial market for corn when worldwide demand is so high? Why do we continue a market distorting policy that gives speculators such fertile ground upon which to speculate?

I think we should learn several major lessons from this policy. One, as I stated earlier, is how important corn is in our daily lives. Second, where the price of corn goes all other grains follow. Third, to create an artificial market for such an important product has many unintended negative consequences. You can take comfort in the fact that through tax dollars and this policy you are financing the increase in your own food prices and those increases are just beginning. Fourth, PETA, with its best-laid plans, could not have done as much damage to the livestock industry as the corn-based ethanol mandate has.

I do think that the corn-based ethanol mandate plays a big part in the current inflation in our economy. If you disagree with that statement, then let's all work together to do away with just one point of the golden triangle of corn-based ethanol and see what happens. If you think I am wrong and think, as several people in recent articles have stated, that ethanol and its mandate have nothing to do with current inflation or the increased price of corn, then doing away with it should change nothing and hurt no one.

Mike Kasten is a Millersville resident.