The Unraveling of the Ethanol Scam

by ROBERT BRYCE

On its website, Wisconsin-based Renew Energy says it is the “biofuels industry leader for innovation and efficiency.” It goes on, saying that its new 130 million gallon per year ethanol plant in Jefferson, Wisconsin is “the largest dry mill corn fractionation facility in the world” which uses 35 percent less energy and 33 percent less water than similar ethanol plants.

That would be impressive but for one fact: Renew Energy just filed for bankruptcy.

The failure of Renew is the latest bankruptcy in the corn ethanol industry, a sector that despite billions of dollars in federal subsidies, hasn’t been able to prove its long-term economic viability. About 9 percent of all the ethanol plants in the US have now filed for bankruptcy and some analysts believe the numbers could go as high as 20 percent.

Even if the 20 percent figure is never reached, it’s readily apparent that  billions of investment dollars will be lost on the corn ethanol scam, a darling of farm state legislators. Today, about four years after Congress increased the mandates on the use of corn ethanol in gasoline, the US is nowhere close to the much-promised goal of “energy independence.” Instead, the increasing use of corn to make motor fuel has caused a myriad of problems. Chief among them: increased food prices.

While it’s true that other factors have helped inflate food prices, including rising energy prices and increased grain demand in other countries, it’s also abundantly obvious that the corn ethanol industry has had a major effect on food prices. The reason is obvious: in 2008, some 4.1 billion bushels of corn – fully one-third of the US crop – was used to make motor fuel. And the results are being seen in the supermarket.

In mid-January, the Bureau of Labor Statistics reported that in 2008, food prices jumped by nearly 6 percent. That comes on the heels of food price increases of 4.8 percent in 2007. Some agricultural economists are now predicting that food prices could increase by as much as 10 percent in 2009. Worse still, those increases are coming at the same time that the global economy is foundering and U.S. unemployment rates are soaring.

Some of that unemployment is happening within the ethanol sector itself. Renew, which had $184.2 million in revenue in 2008, filed Chapter 11 papers on January 30, just nine days after it posted an article on its website from Ethanol Producer Magazine which touted their new ethanol production process as one that “adds up to higher profitability and sustainability.”

The failure of Renew occurred just two days after Oregon-based Cascade Grain Products filed for Chapter 11. Cascade began operating its 108 million gallon per year distillery in Clatskanie, Oregon last June. Another distiller, New York-based Northeast Biofuels, filed for bankruptcy on January 14. That company’s plant, a $200 million facility with 100 million gallons per year of capacity, began operating last August. In October, VeraSun Energy, the second-largest ethanol producer in the country, declared bankruptcy. Other recent failures in the sector include Greater Ohio Ethanol and Gateway Ethanol.

It may be unkind to kick the ethanol industry while it is circling the drain, but little of this financial news is overly surprising. The corn ethanol industry has always depended on federal handouts for its existence. And given this string of bankruptcies, it’s worth reviewing the many studies produced over the past two years that have shown the high costs of ethanol and biofuels. Thus far, I’ve found 14 of them. If readers find more, please send them along.

1. In May 2007, the Center for Agricultural and Rural Development at Iowa State University released a report saying the ethanol mandates have increased the food bill for every American by about $47 per year due to grain price increases for corn, soybeans, wheat, and others. The Iowa State researchers concluded that American consumers face a “total cost of ethanol of about $14 billion.” And that figure does not include the cost of federal subsidies to corn growers or the $0.51 per gallon tax credit to ethanol producers.

2. In September 2007, Corinne Alexander and Chris Hurt, agricultural economists at Purdue University, found that “about two-thirds of the increase” in food price increases from 2005 to 2007 was “related to biofuels.” The report also says, “Based on expected 2007 farm level crop prices, that additional food cost is estimated to be $22 billion for U.S. consumers compared to farm prices for the crops produced in 2005. A rough estimate is that about $15 billion of this increase is related to the recent surge in demand to use crops for fuel.”

3. October 2007, the International Monetary Fund said, “Higher biofuel demand in the United States and the European Union (EU) has not only led to higher corn and soybean prices, it has also resulted in price increases on substitution crops and increased the cost of livestock feed by providing incentives to switch away from other crops.”

3. In March 2008, a report commissioned by the Coalition for Balanced Food and Fuel Policy (a coalition based in Washington, D.C. of eight meat, dairy, and egg producers’ associations), estimated that the biofuels mandates passed by Congress will cost the U.S. economy more than $100 billion from 2006 to 2009. The report declared that “The policy favoring ethanol and other biofuels over food uses of grains and other crops acts as a regressive tax on the poor.” It went on to estimate that the total cost of the U.S. biofuels mandates will total some $32.8 billion this year, or about $108 for every American citizen.

4. An April 8 internal report by the World Bank found that grain prices increased by 140 percent between January 2002 and February 2008.
“This increase was caused by a confluence of factors but the most important was the large increase in biofuels production in the U.S. and E.U. Without the increase in biofuels, global wheat and maize [corn] stocks would not have declined appreciably and price increases due to other factors would have been moderate.” Robert Zoellick, president of the Bank, acknowledged those facts, saying that biofuels are “no doubt a significant contributor” to high food costs. And he said that “it is clearly the case that programs in Europe and the United States that have increased biofuel production have contributed to the added demand for food.”

5. In May, the Congressional Research Service blamed recent increases in global food prices on two factors: increased grain demand for meat production, and the biofuels mandates. The agency said that the recent “rapid, ‘permanent’ increase in corn demand has directly sparked substantially higher corn prices to bid available supplies away from other uses – primarily livestock feed. Higher corn prices, in turn, have
forced soybean, wheat, and other grain prices higher in a bidding war for available crop land.”

6. Also in May, Mark W. Rosegrant of the International Food Policy Research Institute, testified before the U.S. Senate on biofuels and grain prices. Rosegrant said that the ethanol scam has caused the price of corn to increase by 29 percent, rice to increase by 21 percent and wheat by 22 percent. Rosegrant estimated that if the global biofuels mandates were eliminated altogether, corn prices would drop by 20 percent, while sugar and wheat prices would drop by 11 percent and 8 percent, respectively, by 2010. Rosegrant said that “If the current biofuel expansion continues, calorie availability in developing countries is expected to grow more slowly; and the number of malnourished children is projected to increase.” He continued, saying “It is therefore important to find ways to keep biofuels from worsening the food-price crisis. In the short run, removal of ethanol blending mandates and subsidies and ethanol import tariffs, and in the United States—together with removal of policies in Europe promoting biofuels—would contribute to lower food prices.”

7. In mid-June, Kraft Foods Global sponsored a report by Keith Collins, the former chief economist for the U.S. Department of Agriculture economist. In his 34-page analysis of grain prices, Collins concluded the ethanol scam “may account for up to 60 percent of the increase in corn prices between 2006/07 and 2008/09.

8. In late June, Oxfam, the non-profit group that fights global hunger, released a report declaring that biofuels are responsible for about 30 percent of the recent increases in global food prices, and are pushing 30 million people into poverty. Rob Bailey, Oxfam’s biofuel policy adviser, summarized the report: “Rich countries’ demands for more biofuels in their transport fuels are causing spiraling production and food inflation.”

9. In early July, Britain’s Renewable Fuels Agency concluded, “Biofuels contribute to rising food prices that adversely affect the poorest.” The report, known as the Gallagher Review, also said that demand for “[biofuels] production must avoid agricultural land that would otherwise be used for food production. This is because the displacement of existing agricultural production, due to biofuel demand, is accelerating land-use change and, if left unchecked, will reduce biodiversity and may even cause greenhouse gas emissions rather than savings. The introduction of biofuels should be significantly slowed.”

10. On July 16, the Organization for Economic Cooperation and Development (O.E.C.D.) issued its report on biofuels that concluded: “Further development and expansion of the biofuels sector will contribute to higher food prices over the medium term and to food insecurity for the most vulnerable population groups in developing countries.”

11. Also in July, the U.S.D.A., the federal agency that has long been one of the corn ethanol sector’s biggest boosters, admitted that corn ethanol is driving up food prices. That’s somewhat remarkable given that the agency’s leaders have consistently downplayed the link. Nevertheless, in July 2008, the department released a report called “Food Security Assessment, 2007,” which states very clearly that the biofuels mandates are pushing up food prices. The first page of the report says:

…the persistence of higher oil prices deepens global energy security concerns and heightens the incentives to expand production of other sources of energy including biofuels. The use of food crops for producing biofuels, growing demand for food in emerging Asian and Latin American countries, and unfavorable weather in some of the largest food-exporting countries in 2006-07 all contributed to growth in food prices in recent years.”

While that admission is noteworthy, the July 2008 report’s importance lies with its projections about the growing numbers of people around the world who are facing food insecurity. And while the U.S.D.A. report does not correlate this increasing food insecurity with soaring ethanol production, the connections are abundantly clear: As the U.S. uses more corn to make motor fuel, there is less grain available on the market. That means higher prices. And that’s a key factor for residents of poor countries who generally spend a higher percentage of their income on food than their counterparts in the developed world.

For instance, in the U.S. only about 6.5 percent of disposable income is spent on food. By contrast, in India, about 40 percent of personal disposable income is spent on food. In the Philippines, it’s about 47.5 percent. In some sub-Saharan Africa, consumers spend about 50 percent of the household budget on food. And according to the U.S.D.A., “In some
of the poorest countries in the region such as Madagascar, Tanzania, Sierra
Leone, and Zambia, this ratio is more than 60 percent.”

The July 2008 U.S.D.A. report goes on saying that the number of people facing food insecurity jumped from 849 million in 2006 to 982 million in 2007. And those numbers are expected to continue rising. By 2017, the number of food-insecure people is expected to hit 1.2 billion. And, says the U.S.D.A., “short-term shocks, natural as well as economic” could make the problem even worse.

12. In September 2008, the International Monetary Fund estimated that 70 percent of the recent increase in corn prices was due to the ethanol scam. In a report to the United Nations, Olivier de Schutter, a Belgian academic, said “Policies aimed at promoting the use of agrofuels from feedstock, having an inflationary impact on staple foods, could only be justified under international law if very strong arguments are offered.”

13. On October 7, 2008 the United Nations Food and Agriculture Organization weighed into the debate with a 138-page report called “Biofuels: prospects, risks and opportunities.” In the section on food, the report concludes that “Rapidly growing demand for biofuel feedstocks has contributed to higher food prices, which pose an immediate threat to the food security of poor net food buyers (in value terms) in both urban and rural areas.”

14. On January 30, the University of Minnesota announced the results of a new study which compared the overall cost of corn ethanol with that of gasoline. “Total environmental and health costs of gasoline are about 71 cents per gallon, while an equivalent amount of corn-ethanol fuel costs from 72 cents to about $1.45, depending on the technology used to produce it,” said the university. Stephen Polasky, a professor in the university’s applied economics department, said that “These costs are not paid for by those who produce, sell and buy gasoline or ethanol. The public pays these costs.”

ROBERT BRYCE is the author of Gusher of Lies: The Dangerous Delusions of “Energy Independence.”

 

Robert Bryce will publish his fifth book, Smaller Faster Lighter Denser Cheaper: How Innovation Keeps Proving the Catastrophists Wrong.

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