Drought and Renewable Fuel Standard Driving Up Consumer Costs

The United States is experiencing one of its worst droughts in a half-century. But bad federal policy is making it worse by artificially increasing the cost of corn and other food. Worse, the federal government has the ability to waive its “food into fuel” mandates and lessen the impact of its policies, but the Obama administration refuses to do so—allowing food and fuel prices to continue to artificially increase.

The root cause of the problem is the  Renewable Fuel Standard (RFS), originally passed in 2005 and expanded in 2007 through the Energy Independence and Security Act. That act requires that 13.2 billion gallons of corn-based biofuel (ethanol) be produced in 2012, consuming 4.3 billion bushels of corn—almost 40 percent of the nation’s corn crop—an amount just under the 4.6 billion bushels expected to be used as livestock feed. That compares to 1.6 billion bushels of corn, or about 13 percent of domestic corn production, that was distilled into ethanol in 2005.

The U.S. Department of Agriculture (USDA) is predicting the smallest corn crop in 6 years[i], with yield at its lowest level since 1995, largely due to drought. Because the United States is the world’s largest exporter of corn, it is likely that price spikes will ripple through not only U.S. markets, but globally as well.

Can our government help the likely upcoming crisis? It can, but so far it won’t.[ii] The Environmental Protection Agency (EPA) can issue a waiver nullifying the 13.2 billion gallon requirement for corn-based ethanol this year if the agency determines it causes severe environmental or economic harm. Congressional letters (from 156 House of Representatives and 25 senators) were sent to Lisa P. Jackson, Administrator of the EPA, requesting the waiver to the ethanol standard. Livestock producers have also requested a waiver to the requirement because feed scarcity and expensive feed prices are resulting in reductions to herds and flocks. [iii] A recent study estimated that a total waiver of the ethanol requirement would result in a 5 percent reduction in corn prices and save the livestock industry $1 billion.[iv]

Even the United Nations has called upon the United States to ease the use of mandated ethanol so that more of the corn crop could be channeled toward food and feed uses. The United Nations Food and Agriculture Organization indicated that global food prices jumped 6 percent in July, led by a 23 percent increase in the price of corn, and it has warned developing countries to prepare for possible price fluctuations.

On the Chicago Board of trade, corn futures recently traded for about $8 a bushel, up from about $5.20 in June, and slightly below their recent all-time high of $8.20 per bushel. Since 2005, corn prices have more than tripled, mostly because of the renewable fuel standard. In 2005, corn sold for just $2 per bushel. In July, USDA estimated that food prices would climb 3 percent to 4 percent in 2013. And, Capital Economics recently estimated that rising food prices might reduce economic growth by 0.1 percent.[v]

The theory behind the RFS is that it helps reduce imported oil and it can be produced right here at home, but the United States and North America have huge supplies of oil that could mitigate the need for turning our food into fuel.  The problems in most cases are the government’s policies of restricting access to those huge resources, denying permits to pipelines like the Keystone XL, and other anti-oil policies.  The 13.2 billion gallon target for this year is about 800,000 barrels per day, which is equivalent to the amount of oil that would be transported through the U.S. from the Keystone XL pipeline.  When ethanol’s lower energy content is considered, the Keystone energy throughput clearly outweighs this year’s ethanol mandate.

Status of U.S. Ethanol Production

The Energy Information Administration (EIA) indicated that over the past 2 months, ethanol production fell about 14 percent. And for the second half of this year, the agency is cutting its ethanol production forecast from 900 thousand barrels per day to 830 thousand barrels per day.

The United States became the world’s top ethanol exporter in 2011, exporting more than Brazil — the former leader in ethanol exports — when bad weather hurt Brazil’s ethanol production, which it produces from sugarcane. Brazil is still having problems with ethanol production with it falling below its 2010 average of 500 thousand barrels per day.[vi] In 2011, the United States exported an average of 78,000 barrels of ethanol per day—almost 9 percent of domestic production—with Brazil being the major importer.  Weather problems have also hurt agricultural production in other major exporting countries, such as Russia, Australia, and India, raising concerns about global shortages of food commodities that could increase food prices and trigger inflation.

Recently, Smithfield Foods, the world’s biggest producer of pork, said that because of high domestic corn prices, it would start importing corn from Brazil. Thus, the U.S. ethanol industry is using domestic corn to make ethanol and shipping some of that ethanol to Brazil while domestic livestock producers are importing Brazilian corn to feed their livestock in the United States.  This is the consequence of federal law.

Ethanol is more expensive to make than petroleum-based gasoline and is less fuel efficient, which means higher gas prices and more trips to the pump to fill up gas tanks. But the story gets worse. Because of excess ethanol production, the ethanol industry lobbied the EPA to increase the blend of ethanol in gasoline from 10 percent to 15 percent. EPA approved the 15 percent ethanol-blend in June for vehicles of model year 2001 or newer [vii]even though only about 4 percent of all the motor vehicles in the United States are designed to burn fuel containing that much ethanol and despite objections from groups representing small engines indicating  that the higher ethanol blend could damage or ruin motors used in generators, lawn mowers, and other devices.[viii]

Further, the Renewable Fuel Standard also affects gasoline prices negatively because refiners have to pay millions in fines to the EPA because they are mandated to use cellulosic ethanol made from waste vegetation or energy crops, but that fuel does not yet exist because no manufacturer has been able to produce it commercially.[ix]

Conclusion

The U.S. government can help food and livestock feed prices during this drought by issuing a waiver that reduces the ethanol mandate, but so far, the EPA has not indicated a willingness to do so. The United States is now the largest exporter of ethanol in the world taking over that distinction from Brazil. Because of the excess ethanol production resulting from the mandate, ethanol producers requested EPA to increase the ethanol blending ratio with gasoline from 10 percent to 15 percent despite problems that level of ethanol will cause to small engines and in most cars since only 4 percent of those used in the United States were designed for the higher level of ethanol blend.

Our government can take positive action by allowing the waiver, which will cost it nothing. Regarding the waiver, Mr. Randy Spronk, a pork farmer in Edgerton, Minnesota and the incoming president of the National Pork Producers’ Council , said, “If not now, when? Livestock producers are getting killed out here with feed prices.” And that means higher food prices for us consumers as well.