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President Obama's administration fears losing key swing states if it drops corn farmer-friendly quotas

It's a painful memory etched into many chapters of American history -- selling the farm.  But amid a record-setting drought many farmers fear that may be precisely what will happen.  But unlike past farm failures, this one may come not solely from nature, but from the government's decision to artificially inflate corn prices by mandating corn ethanol production.

I. Corn Ethanol - Pork 101

It's hard to understand why corn ethanol fuel in the U.S. has stuck around for as long as it has.

Unlike a handful of nations (i.e. Brazil), the U.S. lacks the resources to supply all its fuel needs with sugary food-crop ethanol.  Thus, unlike those nations U.S. automakers have been largely unable to sell pure-ethanol vehicles to consumers.  That's a game killer for corn ethanol, as it means that consumers pay more at the pump using ethanol than they would using gas as mixed-fuel engines lack the fuel efficiency advantages of pure ethanol engines.

Corn ethanol handouts
The federal government has funneled billions in handouts to the corn lobby. [Image Source: AP]

Then there's the economics -- corn is a food crop, so using it as a fuel source drives up prices on everything from snack foods (corn syrup) to beef (cows eat corn feed).  Finally, there's the environmental issue.  One of the big goals of the alternative fuels movement is to reduce emissions of carbon and noxious (nitrogen or sulfur containing) gases.  But studies have shown corn ethanol actually leads to higher emissions than gas.

Corn ethanol's strange status in the U.S. perhaps began when corn producers seized on the experimental fuel as a means of bumping the billions they already received in government subsidies even higher.  During the Bush and Obama administrations, the corn lobby opened its checkbooks to many members of Congress, and in exchange reaped a multiplier in the form of billions of grants and subsidies for corn ethanol -- all on taxpayers' dime.

Perhaps most significantly, the federal corn supporters authorized the EPA to mandate all fuel sold to contain a certain percentage of ethanol -- in essence forcing all Americans to pay for corn ethanol, even if it was bad for their cars and not something they wanted.

II. Quota Remains Last Major Handout to King Corn

As part of the government's embrace of corn ethanol, the Energy Independence and Security Act of 2007 (EISA) -- passed by Congress and signed into law by President George W. Bush -- mandated a series of ever-increasing production targets to be regulated by the U.S. Environmental Protection Agency (EPA) (a slightly ironic duty consider there was strong evidence corn ethanol harmed the environment).  The idea among corn producers who backed the bill leaning on the candidates they "funded" was ostensibly that this would force future Congresses to commit to ever-increasing subsidies.

But after the recession, public backlash against wanton government spending led to Congress cutting corn ethanol's subsidies.  But Congress did not bother to overturn the EPA's emissions targets.

Cattle farmers
Cattle farmers fear they could go under if corn prices stay artificially high. [Image Source: Texas Vox]

While cutting the subsidy, but leaving the quota might seem like adding insult to injury, corn producers were actually happy (mostly) that the quota remained.  The quota created higher artificial demand, driving up prices.  That artificially elevated demand has helped the corn industry weather the recent droughts, as corn prices have risen 60 percent.  

But while that may have saved big corn's profits in a year which otherwise would have been disastrous, the damage has essentially been passed along to livestock producers.  

Mike Deering, a spokesman for the National Cattlemen's Beef Association, says his organization has pleaded with the EPA to temporarily cut targets to alleviate already drought elevated corn prices made even higher by artificial ethanol demand.  He comments to ABC News, "Our ears are open and the line of communications is open, [but] we do not have any definitive news at this point and time."

III. Trading Higher Food Prices for Votes

Perhaps this is a case of reaping what you sow, but amid pleas from livestock farmers there's not a drop of relief in sight.  The issue lies with how the EISA is structured.

While the EPA has the power to temporarily reduce production quotas, it must receive that request from states or ethanol refiners.  An ethanol trade group -- the Renewable Fuels Association -- said it "wouldn't be surprised" to see such a request, but none has come yet.  The issue is that corn demand actually helps corn farmers, refiners, and corn-producing states.

Currently about a third of corn is used to make ethanol, another third goes to livestock feed, and the remaining third is sent for human consumption either as a vegetable or in various food additives (corn syrup, corn starch, etc.).

The cattle industry warns, "The drought-induced reductions in the corn supply means that the mandated utilization of corn for renewable fuels will so reduce the supply of corn and increase its price that livestock and poultry producers will be forced to reduce the size of their herds and flocks, causing some to go out of business and jobs to be lost."

One problem is that supporting corn ethanol has held the key to Presidents Bush and Obama wining crucial swing-state battlegrounds.  

In 2008 President Obama won three of the four largest corn producing state -- Iowa, Minnesota, and Illinois.  He also won other swing states with large corn growing regions, including Michigan, Ohio, and Wisconsin.  Support of ethanol earned President Obama and other regional politicians key support -- both financial and in votes.  Unsurprisingly politicians in these regions and the President are key supporters of corn ethanol.

Electoral college 2008
Corn ethanol supporters were key to President Obama winning battleground states in 2008.
[Image Source: Wikimedia Commons]

Meanwhile the states who are hurt the most by the quotas -- livestock states like Texas -- are regions where President Obama holds little hope of winning electoral votes.

Of course, there is a risk that supporting government inflation of corn prices could backfire.  Outside of corn producing states who directly benefit from higher corn prices, voters in other swing states might look to punish President Obama and the backers of big corn if failing livestock and higher food corn prices could drive up costs of meat and many dry foods.

For now, though, the quota stands.

Source: ABC

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RE: How would you expect a free market to work
By knutjb on 8/6/2012 3:21:18 AM , Rating: 2
I'll start with
Be careful what you wish for, there are a number of studies that indicate ethanol is keeping the price of fuel at the pump lower than it would be if we needed 10% more oil and refining capacity.
Because of ethanol I lose 10-15% in mpg so that is an empty argument for me.
You might also post a link to the subsidies big oil receives. What was Iraq all about?
Of major businesses "Big Oil" receives the smallest. I would rather get rid of all the subsidies. As for Iraq, your proof? Nothing but conspiracy theory hearsay? Iraqi oil is a tired, non-existent punching bag. The closest link to oil and Iraq would be to stabilize production. Farm subsidies. Oil subsidies.

Oil gets about 6% mostly in deductions. About 38% of farmers get subsidies. Oil gets about $5B per year vs $10B for farmers.

I wish you would show me where the ethanol mandate requires ethanol distillers to produce ethanol at a loss.
If the business can stand on its own I would expect them to make a profit.

Ethanol is a fuel additive. An oxygenate and octane booster. Refiners are able to produce a lower grade gasoline and enhance it with ethanol. Ethanol is required to be used as an oxygenate to clean exhaust omissions in many areas.
Ethanol replaced the far more effective and more hazardous MTBE. The problem wit ethanol is it has a 9:1 fuel air ratio vs gas at 14.7. MTBE didn't hurt mpg, ethanol does that and harms older vehicles and boats. Much of the emissions difference between with/without is quite small. Most cars 2000 up are inherently very low or better emissions without ethanol. So gaining that nth degree becomes very expensive. We have 18 different summer blends that significantly run up costs with negligible real world impact.

I have read a number of differing opinions of how much energy is required to produce ethanol and at best it is a zero sum game. The best real world numbers showed more energy is used to create ethanol than what ethanol provides.

Personally I would rather have a steak and better mpg than get scammed by the politicians and feel good environmentalist every time I fill up.

RE: How would you expect a free market to work
By iowafarmer on 8/6/2012 9:42:54 AM , Rating: 2
Your environmental working group link is interesting. Clinking through to the list of subsidies for individual crops shows they are using estimated, made up numbers for the last 3 years. So maybe recently they inadvertently entered a couple of numbers multiple times to pad their estimate.

The direct payment is an odd payment. It is paid based on farm history and is payed regardless of whether a farmer plants an acer to crop or not. I don't really understand the direct payment. In the last 5 year farm program the direct payment schedule reduced the direct payment to farmers each year. We will see if the direct payment continues in the next 5 year farm program, the current program is about to expire. So the estimated EWG numbers for the last 3 years do not seem to compute.

It could be argued that the crop insurance subsidy promotes crop production by providing a safety net for corn, soybean, wheat etc producers. I think the idea was to replace what seemed to be annual disaster program monies with the multi peril crop insurance subsidy.

Through the years the EWG seems to think government loans to farmers are somehow farm subsidies rather than loans.

By WalksTheWalk on 8/6/2012 10:49:50 AM , Rating: 2
I'll try to ignore your posting name and the bias it implies in your posting.

I live in Minnesota I'm well aware of the ethanol subsidy program. It was a $6B a year federal program and was cut by the feds for a better deal: the Renewable Fuel Standard (RFS), which this article in indirectly about. The corn lobby traded a direct subsidy for the Federal Government's agreement to mandate E10-E15 for every state. This means an automatic boost to the ethanol producers larger than the previous $6B subsidy. This is just a subsidy by another name.

You also indicate that ag producers get a subsidy for growing, so that's one more subsidy in the pockets of the Feds. We can debate the rationality of it, but it's still a substantial subsidy.

The fact is, ethanol makes horrible economic sense because it artificially raises the price of corn along with raising the production for corn, pushing out the production of other foods for given acreage. The high price also raises the price of meats that rely on corn feed. It at least as bad for the environment as gasoline and wouldn't stand a chance in a subsidy free market all things being equal. Study after study shows that ethanol is a bad idea on multiple levels.

By iowafarmer on 8/6/2012 1:34:03 PM , Rating: 2
Actually I selected my user name so you would know I have a dog in the race and that I am interested in seeing accurate information used in the discussion of issues that affect me a family farmer.

I don't see where in my post I pointed to a connection in the government program to a farmers decision to add corn or any other particular crop acres to his crop mix. The direct payment is like a payment to get farmers to report planted acres, farming practices, be eligible for government loans and the big one conservation compliance. The reality is a farmer makes decisions based on market forces. From my perspective ethanol is a market force. I do elect to use 89 octane e-10 in my 90 three quarter ton pickup with about 150K miles and also my 04 car closing in on 250K miles. I have had no fuel related issues with either vehicle, but that's just my own experience. In Iowa I could use 87 octane fuel without ethanol.

As far as multi peril insurance is concerned. I would be enrolled for catastrophic coverage, which is basically no insurance, automatically. Or I pay the premium for the coverage I elect based on my 10 year APH. Premiums can get a little pricy. The premium I pay for the coverage I elect is subsidized by the government.

As far as the RFS is concerned I don't see where the government is subsidizing ethanol producers in any way. I'm also not sure you will see e15 pumps in service stations any time soon. I do think the government is looking at a possible tax (I mean fine) on fuel suppliers when they are unable to meet the ethanol from cellulosic sources quota in the RFS. As I understand it the ethanol component from corn is just about maxed out today. The e15 issue is a pretty gray area for me. I guess you must feel we'll soon be seeing e15 pumps.

As far as Cattle Farmers are concerned, many of my best friends are cattle producers. Ruminate animals can max out the feed value of Distillers Grains. Cattle producers were happy to feed their cattle distillers grains when it was almost given away as a waste product from ethanol production distilled from corn. Now there are some cattle producers that want to eliminate a demand source for corn in the middle of a production cycle. Some cattle producers are wanting to change the rules. If the rule is changed it will affect thousands of rule following farmers with market prices that are likely to be well below cost of production. Choose your poison. If you are going to change the rules give producers warning and do it in the winter so a farmer has a chance to adjust his production decisions for next marketing year.

My cattle producing friends are family farmers and produce their own feed. They are calling their insurance adjusters and will likely collect an insurance payment based on their 10 yr corn APH and elected crop insurance coverage on their drought damaged corn. Once the insurance adjuster determines their corn yield per acre they plan to chop the corn for silage to feed their cattle.

By Nfarce on 8/6/2012 10:48:22 AM , Rating: 1
As for Iraq, your proof? Nothing but conspiracy theory hearsay? Iraqi oil is a tired, non-existent punching bag. The closest link to oil and Iraq would be to stabilize production.

I am also sick and tired of that mindless "Iraq war for oil" nonsensical tripe. Contrary to popular emotion-driven belief, the US imports the vast majority of its oil not from the Middle East, but from Canada and South America combined (to the tune of 60% compared to Iraq's whopping 4.7% contribution that we could easily more than make up for here on our own soil if the politicians and environmentalists weren't in the way).

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