Forget the devastating impact of biofuel production on our surface and ground water. Forget the loss of tens of millions of hectares of natural habitat and its calamitous impact on local and migrating biodiversity. Let us instead focus on the economics of biofuel subsidies and how they contribute to rising food and fuel prices.
The most important biofuel mandate applies to corn-based ethanol. The EPA, no longer constrained by legislation providing guidelines, has continued to increase the number of gallons of ethanol that must be blended into our gasoline supplies. This year, the EPA has mandated the production of 20,770,000,000 gallons of ethanol. A bushel of corn will produce 2.75 gallons of ethanol and the average corn yield is 177 bushels per acre. Basic arithmetic then proves that 41,900,000 million acres of prime farmland in this country is being diverted from food production to fuel production.
The USDA estimates that farmers will plant 89,500,000 acres of corn this year. As a result, a staggering 46.8% of the corn harvest is used to make fuel, nearly the amount used for beef, poultry, corn syrup and dairy!
You don’t have to be an economist to realize that scarcity drives up prices. The exact amount that prices increase as supply decreases is a concept known as price elasticity. Rather than subject the reader to mathematical languor, I ask you to rely on my references. When I was 22, I wrote (along with ET Fujii) an article titled “Price Elasticity of Demand for Air Travel”. The journal was published and helped advance the deregulation of airfares favored by Alfred Kahn.
The document is still taught in business schools and has been widely cited. His concepts spawned a NYSE-listed company with a market capitalization of over $1,000,000,000. So if the question is, “What is the cost impact of a 50% reduction in maize supply for essential foods?” my EDUCATED answer is that it would increase food prices a lot!
The cost impact on fuel is just as dramatic as it is on food. With respect to ethanol mandates, fuel cost drivers include both the creation of a shortage through artificial demand and a hidden tax on motorists. First, let’s address artificial demand. Many studies have been conducted on the energy input needed to produce one gallon of ethanol.
The consensus is that it takes as much energy to produce ethanol as it produces when taking into account the diesel fuel consumed by agricultural tractors and on-road trucks as well as the natural gas consumed in the production of fuel. fertilizer and corn processing. The 1:1 ratio of energy inputs to energy outputs is euphemistically called “energy neutral”. But wait! Energy is consumed once to produce power and then again when consumed in our cars. Energy consumption is doubled! The creation of this artificial demand results in reduced supply and higher prices for other uses.
The other way the EPA raises gasoline prices is through the hidden tax associated with enforcing ethanol mandates. This convoluted system revolves around “RINs” which are fines that must be paid if a refiner fails to meet the 10% ethanol mandate. This practice has the effect of adding a dollar or more to the cost of ethanol and 3 dollars or more to the price of a bushel of corn.
Biofuel mandates should be eliminated. Let free markets determine the value of corn ethanol. Mandates hurt those who need them most by driving up the price of energy and food, two price-inelastic necessities that account for the lion’s share of working-class budgets.
Farm families deserve a strengthened conservation reserve program and the rest of us deserve a break on food and energy prices.
- Jerry Jung is a businessman, philanthropist, and author active with several environmental and conservation nonprofit organizations. He is the founder of ReThink Ethanol, a non-profit group dedicated to raising awareness and education about the use of ethanol.