All Ears On Ethanol

All Ears Turn to Ethanol by Mike Fladlien "Only twice in my life have I ever seen a record corn crop and prices rise," says Don Smith, an octogenarian farmer in Lake View, Iowa. With federal mandates requiring 9 billion gallons of ethanol production and ethanol subsidies of 51 per gallon, farmers in Iowa are finding that corn looks a lot like gold. Farm subsidies originally were put in place to protect farmers from the severe price fluctuations from weather and technological advances. The uncertainty of weather like the flooding Iowa and Illinois experienced in the summer of 2008 could wipe out a family farm. Bad weather combined with bio-technical advances in hybrid engineering like Monsanto’s Round-Up Ready seed corn make agricultural prices volatile. In 1950, there were 18 million jobs in agriculture. In 2002 there are only 3 million. The family farm is an American institution where children who work on the farm gain family values, learn hard work, and learn life lessons about savings. Since 1950, farm output has doubled as farmers have substituted machines for labor. Biotech advances in genetically engineering food have increased the supply of corn.1 Weather and technological advances put downward pressure on commodity prices. When the weather is bad, floods wipe out the cash crop. When the weather is good, excess supply depresses prices. To protect farming as an institution, farm subsidies were put in place in 1933 to provide a steady income for those who chose to work the land. In the 1980’s the subsidies produced excess supply of corn. The government had to store the corn or sell it on the world market. Selling the corn on the open market depressed the world price and farmers from Africa and Europe complained that America was unfairly competing. Storage was costly so the government began to subsidize the production of ethanol. Ethanol production was costly and inefficient but eventually would provide a viable alternative to dependence on foreign oil. To protect the new ethanol industry, the subsidies remain in place today. Sharon Savage, Democratic challenger for the Iowa Senate, sees ethanol as an intermediate step in the quest for renewable energy. “I see ethanol as one facet of a total energy program,” Savage says. “I see it as an important and necessary intermediate step. I think it is great that Iowa is focusing on alternative energy development. We need to release ourselves from the claws of petroleum. It seems that the soil continues to support our population,” Savage says. As the infant industry grows, new innovations will change the way energy is produced and become more efficient. Thus, subsidies are necessary for the biofuels industry to support the infrastructure growth necessary for this growth to occur. As an example of how technology can change the way ethanol is transported might be the development of a pipeline that allows ethanol to be produced in Iowa and piped to the coastal states instead of bulky and inefficient trucking. The subsidies are necessary to develop a cheaper source of biofuels in the future. When this infrastructure is in place, then the subsidies will be removed. Iowa is a net exporter of energy. Nearly 48,000 jobs were created in Iowa and $1.7 billion in disposable income in the ethanol industry. Iowa Corn Growers Association claims that dependence of foreign oil is reduced by 128,000 barrels a day.2

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When the price of a barrel of oil increases, more dollars flow overseas—away from U. S. markets. Many feel that the increase in oil represents a transfer of wealth away from U. S. to foreign producers. Savage states, “The main issue with ethanol is that we are producing it domestically and the money is being spent domestically rather than transferred to other countries. When U. S. citizens buy foreign goods, foreign countries must either spend the dollars they receive on U. S. goods or the foreign countries must buy our debt instruments. When foreigners buy our T-bills, they are buying U. S. assets. Less reliance on foreign energy will retard some of the wholesale selling of U. S. backed securities. Some of the direct foreign investment has found its way to Iowa. According to Iowa Renewable Fuels Association, ethanol has attracted over 3 billion in investment in Iowa.3 A trade deficit actually leads to a capital inflow into the U. S. —part of which makes its way into the Iowa economy. In August, the national unemployment rate was 6.1 compared to 4.6, seasonably adjusted in Iowa. Exports increased 3.3% from June to 168.1 billion. Ethanol has critics. Subsidies lower the cost of production and increase the supply of corn. When farmers plant more corn, they must plant less wheat and soybeans since tillable land are scarce. As a result, the price of wheat rises and so do the prices you pay for bread, pizza, and any other good in which wheat is an ingredient. For Iowans and corn growers all ears are turning to ethanol.

Sources: 1. Mankiw, N. Gregory, Principles of Economics, third ed., Thomson Publishing Company, page 105, 2004 2. http://www.iowacorn.org/cms/en/Ethanol/Ethanol.aspx 3. www.IowaRFA.org .

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