Midwest flooding

Ethanol as the keystone of energy policy takes a body blow!

My family has its share of farmers and I remember family discussions not so long ago where the farmers of the group were dreaming about selling their corn for $2.90 a bushel. Corn was selling somewhere south of $2.40 and cost of production was around $2.35 with rising seed corn prices, fuel, fertilizer, and insecticides. Market conditions such as these led to the aggregation of small family farms into agribusiness conglomerates which had economies of scale, purchasing and pricing clout. Also they had political clout.

The food production and distribution supply chain in the United States is a complex system, so it’s hard to fault the farmers who just want to break even; and making ethanol from corn seemed like a good idea. Washington agreed — after all, working with the agribusiness people is a lot more pleasant than fighting with the whacko environmentalist lobbies who opposed offshore and ANWR drilling. The Energy Independence and Security Act (EISA) of 2007 mandated a 500% increase in Ethanol usage in gasoline by 2022. Farmers were ecstatic and planted more acres of corn and trucked more of that which they grew to ethanol plants sprouting like morels after a spring rain. The same act subsidized ethanol to the tune of 51 cents per gallon.

Now others looked at this act and compared the efficiency of ethanol production (e.g. energy required to plant, cultivate, harvest and convert corn into ethanol) to that of gasoline production. Even with the subsidies, the overall production energy balance was unfavorable. Given that the energy output per unit weight was much higher in gasoline than ethanol, the absolute energy balance was even worse. Then others (not me), concerned about the carbon footprint, noted that ethanol generated massive amounts of carbon during the fuel cycle. The journal Science concluded that corn-based ethanol would nearly double greenhouse gas emissions over 30 years. Finally, as more and more corn was diverted to alcohol, the impact on the food supply began to be felt. Corn based products began to rise and countries dependent on US exported grains felt the pain. Beef prices rose as corn feeds rose in price. HFCS (high fructose corn syrup) costs rose and since it’s used in about everything, the price of everything rose.

Basically, Congress created an Energy Policy by taking advice from one group of people without consideration of the unintended consequences, even though many could predict them. And will they change this policy? No — not politically feasible.

Nature however is not beholden to lobbyists and does not need campaign contributions. With the Midwest flooding of Iowa and other corn production states, corn is now around $7.45 a bushel. July corn futures traded Wednesday on the Chicago Board of Trade at $7.46 a bushel, up about 25% from early this month before the flooding. The recent wave of flooding prompted the U.S. Department of Agriculture this week to lower the nation’s corn production estimate to about 11.7 billion bushels — or 10 percent less than last fall’s crop.

July ethanol futures traded recently at $2.91 a gallon, up about 20% from around $2.40 a barrel before the flooding. Even with the subsidies, ethanol is becoming more expensive than gasoline. More to the point, plant owners have no chance in hell of recouping their investment in plant and equipment when the raw material costs exceed the price they can charge in the marketplace. Consequently, investor groups are shutting down ethanol plants in droves. Heartland Ethanol dropped plans to build seven ethanol plants in Illinois. Analysts lowered their year-end capacity forecast to 9.5 billion gallons from 10 billion of ethanol produced.

So the Midwest flooding is using the hammer of raw economics to do what Congress is unwilling to do for fear of alienating the agribusiness lobbies. Sometime there is a silver lining even to the horrible circumstances of a flood.

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