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A few years ago the “food versus fuel” debate raged in Washington. It
centred on whether the US government’s corn ethanol mandate squeezed
scarce grain supplies and pushed up food prices.
It is time to revisit that debate.
Biofuels refineries have been churning out record volumes of more than
1m barrels a day of corn ethanol. The US Department of Agriculture
predicts the American ethanol industry will digest 5.275bn bushels of
corn this year, the most ever and 35 per cent of the domestic harvest.
Yet last week, corn dropped to $3.01 a bushel, a level last consistently
seen before lawmakers enacted the mandate in 2007. Supermarkets will
raise food prices less than 1 per cent this year, well below the
historical average, according to the USDA. The UN’s international food
price index is also lower than in 2007.
The ethanol debate raged when corn prices spiked in 2008 and again in
2012, seemingly in concert with rising biofuels volumes. Opponents of
the mandate still believe it is distorting grain markets. “The
requirement has created a huge demand for corn, which has dramatically
increased its price,” the National Council of Chain Restaurants says on
its website.
Except prices have declined instead. The simple reason is because the US
is on the doorstep of a colossal corn harvest. The USDA foresees a crop
totalling 15.2bn bushels this autumn, the most in history. The surplus
still lying around next year is projected to total 2.4bn bushels — a
figure that recalls the 1980s farm bust.
Scott Irwin, agricultural economist at the University of Illinois, says
the grain market managed to absorb strong ethanol industry demand
because farmers cultivated more corn acreage, corn yields have continued
to march higher and growing regions have been blessed by years of
beneficial weather.
The ethanol mandate has also levelled off. The law called for raising
corn ethanol use from 9bn gallons in 2008 and plateau at 15bn starting
last year. Even then, the White House has tweaked the mandate to require
only 14.5bn gallons in 2016. There are 42 gallons in a barrel.
Yet the Renewable Fuels Association expects the industry will produce
about 15.2bn gallons of ethanol this year as it profits from cheap corn
and exports to countries including Canada, India and Brazil — the latter
the second biggest biofuel producer after the US.
“What strikes is how ethanol production has grown just when we thought
it would be flat,” says Joseph Glauber, senior research fellow at the
International Food Policy Research Institute, who served as USDA’s chief
economist at the dawn of the ethanol boom.
A coalition of food and oil companies, free-market think-tanks and
environmental groups wants Congress to repeal the renewable fuel
standard, each for its own reasons. Dave Juday, consultant to the
National Chicken Council, whose members’ flocks eat corn, warns the age
of plentiful chicken feed will not last.
“The bottom line is we’re only another drought, freeze or flood away
from another crisis,” he says. “While corn prices may be low and the
livestock industry is back to profitability right now, there’s still a
big artificial demand for corn” coming from the mandate.
Geoff Cooper of the RFA, an ethanol lobby group, acknowledged that
demand from the ethanol industry supports corn prices, a reason why
farmers invested in new ethanol refineries. But he argues the coincident
facts of $3 corn, ample food supplies and strong ethanol production
“should be the final nail in the coffin of ‘food versus fuel’”.
“I don’t think there’s anybody who can argue with a straight face today
that the ethanol industry is somehow a key driver of abnormal food
prices, or causing high food prices,” he says.
One argument against the renewable fuels mandate is its inflexibility:
the volumes are prescribed whether there is a bumper crop or a short
one. The biofuel industry counters that fuel companies can purchase
credits in lieu of using ethanol. Prices for these credits have soared
28 per cent in the year to August, according to Oil Price Information
Service, drawing complaints from oil refiners.
The collapse of oil prices has had a two-edged effect on ethanol
markets. On one hand, cheap petrol has enticed drivers back on the
roads. About 10 per cent of each gallon of US gasoline is blended with
ethanol, so high gasoline demand also lifts ethanol sales.
But wholesale gasoline is now cheaper than ethanol, curtailing
consumption beyond what is needed to meet the mandate or follow
air-quality regulations.
With tractors now gearing up for the harvest, all agree there will be
plenty of corn to go around in 2016. “Extra demand from ethanol
production helps corn prices,” says Bruce Babcock, economist at Iowa
State university. “But the supply completely outstrips that demand.”
The “food versus fuel” debate is losing some of its venom.
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