Ethanol Comes Under Fire for Rising Food Prices

Published July 1, 2008

With soaring food prices devouring ever-increasing amounts of consumers’ disposable income, the nation’s infatuation with biofuels, particularly corn-based ethanol, is rapidly going sour.

Activists Oppose

Environmental activists and their political allies have been among those to turn against ethanol subsidies and mandates that were initially hailed as a cure for global warming.

Lester Brown of the Earth Policy Institute and Jonathan Lewis of the Clean Air Task Force wrote in the April 22 Washington Post, “These ‘food-to-fuel mandates’ were meant to move America toward energy independence and mitigate global climate change. But the evidence irrefutably demonstrates that this policy is not delivering on either goal. In fact, it is causing environmental harm and contributing to a global food crisis.”

“I think very definitely there is a clear connection between our ethanol use and world hunger,” agreed Sen. Edward M. Kennedy (D-MA) in a May 1 article by the Cybercast News Service.

Once considered a political steamroller opposed only by egghead economists and global warming skeptics, ethanol programs are now under attack from all sides. The fall from grace has been swift, even by Washington political standards.

Sharply Escalating Mandates

In 2004, 3.5 billion gallons of ethanol were used as a gas additive in the United States. The Energy Policy Act of 2005 raised the amount of biofuels (usually ethanol) that must be mixed with gasoline to 4 billion gallons in 2006, 6.1 billion gallons in 2009, and 7.5 billion gallons in 2012. In effect, Congress mandated more than a doubling of ethanol use over just seven years.

Congress and the Bush administration gave ethanol a further boost by teaming up to enact the Energy Independence and Security Act of 2007, which accelerated the ethanol mandate to 9 billion gallons in 2008 (nearly triple the 2004 level), rising to 36 billion gallons (a tenfold increase over the 2004 level) in 2022.

Ethanol Consuming Food

Already supported domestically by a 51 cents per gallon subsidy and protected from foreign competition with a 54 cents per gallon tariff on imported biofuels, ethanol became even more attractive to farmers in the Corn Belt, eager to cash in on the new federal mandates.

But the rush to convert cropland from food to fuel was soon felt in supermarkets across the United States. “By the end of the 2006/7 crop year, over 2 billion bushels of corn (19 percent of the harvested crop) were used to produce ethanol,” the U.S. Department of Agriculture (USDA) reported earlier this year. “Higher corn prices motivated farmers to increase corn acreage at the expense of other crops, such as soybeans and cotton, raising their prices as well.”

Corn Prices Skyrocketed

Robert Murphy, an economist with the Institute for Energy Research, notes the monthly average price of corn jumped from $2.06 per bushel in January 2006 to more than $6.00 per bushel on the Chicago Board of Trade on May 1, 2008.

In May The Wall Street Journal reported the U.S. ethanol industry this year is projected to consume a record 4 billion bushels of corn–one-third of the expected U.S. harvest. Adding fuel to the fire, the Labor Department reports U.S. food prices rose 0.9 percent in April, the largest one-month jump in 18 years.

“There are many factors that contribute to rising food prices, including government-induced demand for ethanol, rising oil and gasoline prices, strong economic growth in poorer countries, and a general weakening of the U.S. dollar against other currencies,” Murphy noted.

“But when 20 percent of U.S. corn production is being diverted from the dinner table to the gas tank, we can confidently say that the ethanol mandate has had–and will continue to have–a lasting impact on the price of food,” Murphy said.

Call to Repeal Mandates

Growing discontent over the effects of corn-based ethanol mandates has reached well into the ranks of environmental activist groups.

In early May, the Earth Policy Institute, Clean Air Task Force, Friends of the Earth, and Environmental Working Group wrote to Rep. Rick Boucher (D-VA), chairman of the House Subcommittee on Energy and Air Quality, “The Renewable Fuels Standard was based on the sound premise that America needs a reliable, renewable, and environmentally beneficial alternative to current carbon-intensive fuels. But any solutions we face must be sustainable for the environment and for people.”

At the other end of the political spectrum, Rep. Jeff Flake (R-AZ), a member of the House Natural Resources Committee, has launched the most aggressive attack yet on ethanol. His unambiguously named “Remove Incentives to Produce Ethanol Act of 2008” (H.R. 5911) would do exactly what its title says. Flake’s bill would repeal all renewable fuel standards, repeal tax credits for ethanol producers, and repeal tariffs and duties on imported ethanol.

“This is a classic case of unintended consequences,” Flake said. “Congress surely did not intend to raise fuel prices by incentivizing ethanol, but that’s precisely what’s happened. A jump in food prices is the last thing our economy needs right now.”

Ethanol Producers Fighting Back

Ethanol producers dispute that growing ethanol production is playing a significant role in rising food prices.

Rick Tolman, CEO of the National Corn Growers Association (NCGA), told ethanol supporters in Lincoln, Nebraska, “The facts are on the table. Ethanol is not the majority increase in food prices.” NCGA is teaming up with the Renewable Fuels Association and the National Biofuels Coalition to block any congressional effort to undo the ethanol mandate or the tariff and subsidies the fuel receives.

Ethanol still enjoys the backing of the Bush administration, with Agriculture Secretary Ed Schafer rejecting charges the fuel is responsible for driving up food prices in the United States and abroad. “Only a small part of this problem is driven by ethanol,” he told the May 10 Washington Times.

Bonner R. Cohen ([email protected]) is a senior fellow at the National Center for Public Policy Research in Washington, DC.