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August 1, 2012

Amid a drought, does it still make sense to use corn for fuel?

The biggest U.S. drought in half a century is devastating farms across the Midwest. Crops are wilting. Food prices are on the rise. Under the circumstances, then, does it still make sense for the government to divert a hefty portion of the nation's corn output into making fuel?

Some groups are starting to ask exactly that question. This week, a coalition of U.S. meat and poultry producers called on the Environmental Protection Agency to relax its corn-ethanol program for one year. The producers argued that the heavy use of corn for fuel is driving crop prices even higher at the worst possible moment. (The EPA denied a similar request from Texas Gov. Rick Perry in 2008.)

"America's pork producers are extremely worried, given the drought affecting much of the corn-growing regions, about having feed for their animals," said Randy Spronk, president of the National Pork Producers' Council, in a statement.

It's not hard to see why they're worried: Under the EPA's Renewable Fuel Standard, U.S. refineries are required to blend their gasoline with a certain percentage of biofuel each year. The rule has helped the United States reduce its dependence on oil. But it also requires a lot of corn. In 2012, the standard will require 13.2 billion gallons of ethanol, which could consume as much as 40 percent of this year's already shrunken corn crop.

Meat and poultry producers get hit especially hard when the price of corn and animal feed rises. Many livestock producers have to respond by culling their herds to stem losses. In the short term, that leads to a drop in meat prices, which squeezes the industry further.

Yet corn growers and ethanol producers say it's too soon to panic. "With the crop still in the field, it is too early to determine this year's final corn supply," said Garry Niemeyer, president of the National Corn Grower's Association, replying to the petition. What's more, Niemeyer noted, the ethanol industry has a surplus of fuel right now, which can help offset the impact of the drought. Under the EPA's program, ethanol producers can carry over credits from year to year, giving them some flexibility to deal with shortages.

By and large, corn farmers benefit from the ethanol mandate during droughts, says Michael Roberts, an agricultural economist at North Carolina State University. Because the demand for corn stays so inelastic, the price tends to rise high enough that it offsets the losses farmers suffer from reduced crop yields. "It's ironic but corn farmers are actually going to benefit from the drought," Roberts says.

The real pain, by contrast, could be borne by the rest of the world. The United States is one of the world's biggest suppliers of corn, accounting for some 60 percent of global exports. A recent modeling study by the New England Complex Systems Institute (NECSI) found that the ethanol mandate, coupled with the drought, could soon push global food prices up to levels last seen in 2008, when food riots erupted in countries from Egypt to Haiti. "Reducing the amount of corn that is being converted to ethanol may address the immediate crisis," concluded NECSI.

Other experts, however, aren't convinced that the effects of relaxing the mandate would be quite so dramatic. A recent study by Bruce Babcock of Iowa State University found that completely waiving the renewable fuel standard for one year would reduce corn prices just 4.6 percent. That could provide a small boon to the U.S. livestock industry_providing a benefit of about $1 billion, by one estimate_but it's unclear whether it would be enough stem a possible food crisis overseas.

Regardless of the numbers, biofuels mandates are coming under increasing scrutiny. Last year, the World Trade Organization called on governments to pare back their ethanol laws, saying that they had increased food volatility around the world. Some scientists have argued that corn-based ethanol can actually be worse for the environment than gasoline if they indirectly drive deforestation. (Advanced biofuels made from non-foodstuffs, such as algae, are still not yet viable, though they're the focus of a great deal of research.)

And some members of Congress have criticized government support for ethanol as an outdated form of corporate welfare. Last year, for the first time in three decades, Congress allowed a tax credit for ethanol production to expire. The credit was worth $6 billion in 2011. At the time, the ethanol industry didn't put up much of a fight to preserve the credit_after all, the renewable fuel standard would ensure a continued market for their products.

But now even that standard is starting to come under attack. Earlier this week in the House, Reps. Bob Goodlatte (R-Va.) and Jim Costa (D-Calif.) introduced a bill, supported by the livestock industry, that would relax the ethanol mandate by up to 50 percent when supplies are low.

 

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