Ethanol: Punishing the Poor

It has been established over the past 4-5 years that the ethanol mandate has caused a rise in food prices.  This is a result of a decline in global corn production, the diversion of corn from food to ethanol, and the Energy Policy Act of 2007, which sets annual volumetric targets for ethanol use between 2007 and 2022.

Those targets rise from 9 billion gallons in 2005 to 36 billion in 2022.  No more than 15 billion gallons could be produced from corn.  As a result a growing percentage of the corn crop has been diverted from food production to ethanol production.

The effect on food prices has been documented widely.   One report was by Purdue’s Farm Foundation policy organization.  And, the CEO of General Mills stated that corn prices have increased 30%-40% in just the past year; “ we’re diving up food prices unnecessarily.”  An article in MIT’s Technology Review cited the price of corn tortillas which have doubled.  It also concluded, “All things that use corn are going to have higher prices and higher cost … that will be passed on to consumers,” The impact  … is being felt first in animal feed, particularly poultry and pork. Poultry feed is about two-thirds corn; as a result, the cost to produce poultry–both meat and eggs–has already risen about 15 percent due to corn prices”.

The 36 billion gallon mandate limits the amount of corn ethanol to 15 billion gallons; the remainder is to be cellulosic ethanol.  Unfortunately, the technology to produce cellulosic ethanol in commercial quantities does not exist and is not expected to be commercially viable anytime soon.

Refiners/blenders to avoid having to pay a fine for not using what does not exist are importing ethanol made from sugar cane.

According to a December 18 Wall Street Journal report, “ Commodities investors are betting that rising U.S. demand for sugar-based ethanol will reduce supplies for the sweetener and curb a decline in prices.”  The Journal report the president of Kerr Trading International as saying, “Demand (for ethanol) is sucking away more and more of the sugar supply.”

Every product made with sugar and every product made directly or indirectly from corn is being made more expensive.  The price increases caused by unnecessarily having to use ethanol represent a regressive tax on low and fixed income individuals.  As bad as that is in a country that has 25 million un or underemployed citizens, it is worse in developing countries where the poor live in or on the edge of devastating poverty, surviving on the equivalent of $1 a day.

There is no compelling reason for the ethanol mandate.  Fuel and vehicle manufacturers can meet tailpipe standards without adding 10% or more ethanol to gasoline.  So, striped of all its green rhetoric, the ethanol mandate is enriching farmers and ethanol manufacturers on the backs of the poor.  That is a trade-off that has no justification.