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Corn farmers say "let the profits trickle down", while other farmers say quotas will kill jobs

There's a growing debate about what is put inside your fuel pump.  At the heart of the debate is a two-carbon alcohol -- ethanol.  This little fuel is creating a huge debate, which has divided the farming industry and raised perennial questions regarding the cancerous influence of special interest on the U.S. federal government.

I. Big Corn Makes Friends

When it comes to corn ethanol the message from Congress is clear: cut down on the ethanol production.  But the U.S. Environmental Protection Agency (EPA) is still waffling on whether to keep its strict quotas, or to "temporarily" relax them, after the worst drought in decades hit parts of the U.S.

With the drought hurting corn yields, farmers have been forced to compete with ethanol producers and the food industry for an insufficient supply.  Some farmers have, in their desperation, turned to feeding their cows candy, as cast-off bulk sprinkles are cheaper than the traditional corn feed.

The EPA's holds a tight grip on the amount of corn going into ethanol, thanks to its ability to regulate fuel in the U.S.  Under The Energy Policy Act of 2005 (often referred to as the Renewable Fuel Standard), which passed under President George W. Bush, fuel blenders are required to incorporate a certain amount of ethanol into gasoline blends at the pump, with the amount being bumped a little bit each year.

pumping fuel
The U.S. government mandates ethanol be blended into gasoline, to create artificial demand for corn. [Image Source: Nation Corn Growers Assoc.]

Studies have suggested that going from the corn-field to fuel pump corn ethanol is an energy negative process, consuming more energy than it produces, and offering up higher life-cycle carbon emissions that standard gasoline.  Further, automakers say gasoline-ethanol blends can harm traditional engines and deliver worse gas mileage than pure gasoline.  So the compelling question has long been why did the U.S. jump so deep into corn ethanol, and in doing so "accidentally" drive food and livestock feed prices upward.

In Congress' case, it appeared to be largely special interests.  Senators and representatives from corn farming-heavy districts/states accepted funding from farmers to help them get elected, and in turn pushed for the seemingly illogical ethanol blending requirements, which create artificial demand, driving corn prices up.  They also for some time passed billions in subsidies along to big corn farmers.

As recently as last year some senators -- Senators Tom Harkin (D-Iowa); Tim Johnson (D-South Dakota); Amy Klobuchar (D/"Farmer-Labor Party"- Minnesota); and Al Franken (D/"Farmer-Labor Party"-Minnesota) -- proposed increasing ethanol quotas via the trickily worded Biofuels Expansion Act of 2011.

II. Drought, Spending Cuts Threaten Corn Special Interests

But the ethanol special interests saw their grasp on Congress weakening last year amid the partisan rancor regarding the budget.  In a battle by each side to preserve their special interests, corn found themselves too short on the special interests pecking order to convince Congress at large to continue to vote for bloated subsidies.

In the aftermath, the subsidies were slashed, and then eliminated altogether.  Republicans in Congress also banded together to block the EPA's plan to increase ethanol blending to 15 percent nationwide, although the EPA found a way to sneak around that restriction.

But even the EPA -- who seemed firm on its ethanol commitment -- has started to show signs of doubt after an entirely external, non-political influence hit -- the drought.  The record drought is essentially forcing the EPA's hand, by creating corn shortages and hence amplifying corn ethanol's already undesirable price effects.

The EPA announced it would make its decision [PDF] about a potential waiver on blending requirements early next month.

Amid a record drought either the quota or jobs will be lost, say many farmers.
[Image Source: AP]

Eight state governors and 200 members of Congress have written a letter (on behalf of the slightly ironically named National Pork Producers Council) to the EPA pleading with it to relax blending rules via a waiver, at least for the rest of the year.  Delaware and Maryland's governors write that without a waiver the EPA would be creating "the loss of thousands jobs."

A number or researchers also signed a letter calling for a waiver.  Among them is John M. DeCicco and Ivette Perfecto from the University of Michigan School of Natural Resources and Environment.  They write, "The (Renewable Fuel Standard) diverts potential food crops to produce fuel, which drives up food price volatility and global food prices."

III. Big Corn Farmers Argue Higher Prices are Good for Everyone

Corn farmers are opposed to the idea, which would reduce the artificial demand that they currently enjoy.  The National Corn Growers Association essentially admits that it's acting out of greed, but making the argument that higher revenue from corn farmers stimulates the economy in a trickle-down effect.  They point out that corn farmers' revenue rose from $63B USD to $90B USD between 2007 and 2012.

They comment [PDF], "Higher feed prices are only one piece of a complicated economic puzzle... [a waiver would cause] severe harm to the economy."

corn profits
Big corn argues that its profits are worth more than whatever job savings might be realized by quota cuts. [Image Source:]

Before the drought corn prices had increased nearly four-fold from 2007 levels.  The fuel supply industry was set to (by EPA requirement) deliver 15.2 billion gallons of corn ethanol this year -- up from 5 billion gallons in 2007.

But the payday for big corn may soon be over.  After all, the Obama administration has a relatively substantial degree of control over the EPA -- a federal agency -- and it may be wary of refusing the waiver request, lest it trigger the predicted job loss and hurt the President' reelection prospects.

Sources: Detroit News, NPCC, Nation Corn Growers Assoc., EPA

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For the Record
By KColombini on 10/12/2012 4:26:22 PM , Rating: 2
Your blog post does not quote our comments correctly, and the PDF link goes to something else entirely. What NCGA states is that "we believe the burden of proof for severe harm to the economy falls on the petitioner. We believe the petitioners have failed to establish this proof, since higher feed prices are only one piece of a complicated economic puzzle." You can read our full comments here:

Ken Colombini, National Corn Growers Association

RE: For the Record
By Ringold on 10/12/2012 5:02:19 PM , Rating: 3
What factors exactly move a market price is, as you point out, very complicated.

But any economist (or first year econ student) can say plainly that if any staple commodity market suddenly has a large portion diverted in to a black hole then that'll exert strong upward pressure on the price. There's no need to amass an army of PhD's and spend a year creating some sensitive, highly complex model that tries to separate all the little factors, because at the heart of the matter it's a very simple problem.

Or, if not for this quota, all else being equal, the price of corn would undoubtedly be lower.

And further, due to the substitution effect we can see, where corn is getting a larger share of acreage, that means a spill-over effect to every other crop that could be grown in the same places. Higher prices across the board, again, all else being equal.

This would normally be a wonkish argument reserved for the papers of trade journals and politicians/technocrats, but this isn't some gadget or cell phone or ball bearings we're talking about. It's food. When we live in a country where we've got people going through hard times and in a world rapidly boosting its demand for food, diverting food for the vanity of burning in a fuel tank when such better options exist strikes everyone thats not a farmer or eco-terrorist as insensitive at best, or unwise..

I know it's in your economic interest, but your NCGA is on the wrong side of the moral and economic argument. A more noble position would be to transition out these ethanol quotas and instead focus your efforts on exporting to China and India, but that's not as easy as the ethanol cash cow, I know.

RE: For the Record
By bill.rookard on 10/12/2012 6:34:11 PM , Rating: 3
That's all well and good that you feel your comments might have been taken slightly out of context, but lets be straight about several things:

1) It does not take an economics expert to come to the conclusion that taking a large segment of a crop and allocating it towards fuel usage REMOVES that percentage of crop from the food supply. Absent an offsetting increase in crop production (which cannot happen as we are assuming a relatively fixed supply) the prices will increase due to simple supply and demand. There is only a certain amount of arable land for food growth and production, shifting production to corn, something else will have to give. Whether it's corn prices rising, or soybeans because there is more corn vs soybeans, average food prices will rise. Thus my prices for -essential foodstuffs- goes up.

2) On a technical note it cannot be argued that ethanol has a lower energy density than gasoline. Thus - increasing the percentage of ethanol in a vehicle (potential damage aside) means that I am going to get progressively WORSE fuel economy (by my calculations it will drop by about 10%). Thus, I am going to pay more at the pump and my prices for fueling goes up.

3) Long term exposure of a relatively modern fuel system to corrosive ethanol has not been determined. While most automakers say their vehicles -should- be ok (and flex-fuel specific vehicles will be fine), most non-flex vehicles are evaluated and designed around the 10% marker. Increasing this value for long term exposure -might- be ok, it may not. Assuming there -could- be some damage because of the more caustic fuel means that best, I might luck out. But the possibility DOES exist that my vehicle could suffer extra maintenance or repair costs - which means again, my costs go up.

4) With all due respect, you are not an unbiased opinion as you are a representative of the group which is pushing it's product into a mandated federal program which will ultimately benefit your group at the expense (in ways as outlined above) of my (and everyone elses) pocketbook.

So - just as a quick note on these three issues, two of the three are GUARANTEED to cost me more every day. The third has a possibility of costing me more in the long term. I have yet to see that there are any real, tangible benefits to the mandated use of ethanol in every day vehicles.

RE: For the Record
By ritualm on 10/12/2012 7:25:21 PM , Rating: 1
Your arguments amount to "we must increase corn ethanol quotas regardless of all other factors", and your supporting 'proof' postulates that everyone will benefit via the trickle-down effect. Except none of your claims ever materialized. What your position does, however, is ensure that corn growers make big money at the expense of everyone else in the midst of a widespread drought. Is this what you call the "trickle-down effect"?

"we believe the burden of proof for severe harm to the economy falls on the petitioner. We believe the petitioners have failed to establish this proof" - props for lying with your eyes wide open, Ken Colombini. You are bullshitting.

RE: For the Record
By DigitalFreak on 10/12/2012 8:48:50 PM , Rating: 2
Burn in hell.

RE: For the Record
By PontiusP on 10/13/2012 7:24:04 AM , Rating: 2
Hey Ken, for the record, your product should be able to compete on its merits, not by stealing money from the rest of us taxpayers. All subsidies and quotas should be ended *now*. People like you are killing this country with your fascist economic model that is in direct contradiction with the liberty based model this country was founded on.

"Young lady, in this house we obey the laws of thermodynamics!" -- Homer Simpson

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