The Ethanol Disaster

Ethanol production has been increasing annually for some time now and last year over 9 billion gallons of ethanol were used. But it is rife with problems and costs that have always made it unpalatable to consumers leading to massive government interventions in favor the product, usually at the behest of agri-business, farmers, and the politicians from states with significant agriculture. Of course Corn is the primary crop used:

From the CBO--Most ethanol in the United States is produced from domestically grown corn, and the rapid rise in the fuel’s production and usage means that roughly one-quarter of all corn grown in the U.S. (nearly 3 billion bushels) is now used to produce ethanol. The demand for corn for ethanol production has exerted upward pressure on corn prices and on food prices in general. CBO estimates that the increased use of ethanol accounted for about 10 percent to 15 percent of the rise in food prices between April 2007 and April 2008.

A 10 to 15 percent increase is an extraordinary amount and clearly regressive in nature. None suffers more from these policies than the working and middle class, its there government that is actually pushing more expensive food! Ah, but the billions in subsidies by the Fed, that is only part of the equation, get a load of this gem:

In turn, increases in food prices will boost federal spending for mandatory nutrition programs such as the Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps) and the school lunch program by an estimated $600 million to $900 million in fiscal year 2009. The Special Supplemental Assistance Program for Women, Infants, and Children—better known as WIC—is a discretionary program that provides a specific basket of goods to recipients rather than a set cash benefit, so changes in food prices in 2008 had an immediate impact on costs for the program. Under the assumption that the effects are much the same, increased production of ethanol would have added less than $75 million in fiscal year 2008 to the cost of serving the same number of WIC participants as in 2007.

The Fed policies lead to more spending in other areas! I suppose 900 million is a quaint amount in the age of Obama, even still it illustrates the craziness of these interventions. Right now they think ethanol reduced emissions by 1 percent and may reduce them further, but then again all of the increased development need to grow crops might wipe out any supposed gains. Its just a disaster and with various ethanol companies going belly up expect more government bailouts and help. As for imports and and the magical "Brazilian" ethanol, protectionism makes sure to kill that:

The production subsidy for ethanol applies to both domestic and imported ethanol, but the United States charges importers of ethanol a tariff of 54 cents per gallon and an ad valorem tariff of 2.5 percent of the value of the imported ethanol. (Prices for ethanol sold in the United States fluctuated between $1.61 and $2.90 per gallon in 2008, resulting in ad valorem tariffs that ranged from 4 cents to 7 cents per gallon.) 8 The two tariffs effectively offset the production subsidy for imported ethanol unless the imports arrive duty-free. The United States imports relatively small amount of ethanol duty-free from countries that participate in the Caribbean Basin Initiative:an annual amount equal to as much as 7 percent of the nation’s ethanol consumption over the previous 12-month period ending on the preceding September 30.9

Don't expect this Admin to shake its protectionism over this issue. So how does ethanol stack up against gasoline?

The economic viability of producing corn ethanol—whether manufacturers can show a profit—is intrinsically linked to the price of gasoline (for which ethanol is a substitute) and to the price that ethanol producers pay for corn. The Congressional Budget Office’s (CBO’s) analysis of current technologies and prices suggests that, without subsidies for producing ethanol, the “break-even ratio” of the price per gallon of retail gasoline to the price per bushel of corn is currently about 0.9.1 In other words, when the price of a gallon of gasoline is more than 90 percent of the price of a bushel of corn, it is profitable to produce ethanol. At that point, revenues from the sale of ethanol would be sufficient to cover the fixed and variable costs of producing it.

In other words:

It is unlikely that, on average, ethanol producers over the past several decades would have turned a profit if they had not received production subsidies.

No kidding and by the way the damage is not just in the United States:

The impact of higher prices for food will probably be greater in other countries than in the United States because the percentage of households’ income that is spent on food in those other nations is larger and the value of commodities makes up a bigger share of the cost of food. (In 2007, the share of spending for goods and services that a household allocated to food purchases for consumption at home was less than 6 percent in the United States but more than 32 percent in India.

Making developing countries pay more for food, sounds like a great way to win friends and influence people. And where does Obama stand on massive government programs that dislocate markets waste billions and make life tougher for working and middle class Americans, all for it.!