For the first time since the United States government began subsidizing ethanol, its defenders are on the run. World hunger is chipping away at the image of one of America’s most-outrageous subsidies, even sympathetic politicians are being forced to admit that the biofuel industry has gone too far this time.
“I’ve supported ethanol from the beginning,” Sen. Dick Durbin
said (D., lll.) last week. Durbin represents the nation’s second-largest corn-producing state. “But we have to understand it’s had an impact on food prices. Even in the Corn Belt, we’d better be honest about it.”
The use of corn as a substitute for oil — made possible only by government subsidies — is now consuming more than one-quarter of America’s 13-billion-bushel corn crop. It has also caused corn prices to follow the skyrocketing price of oil. The price of corn, and the prices for every food product for which corn is an input (meat and dairy) or substitute (all other grains), have increased dramatically as well.
Ford Runge and Benjamin Senauer
wrote last year in
Foreign Affairs that biofuels are starving the world’s poor:
[I]f, all other things being equal, the prices of staple foods increased because of demand for biofuels . . . the number of food-insecure people in the world would rise by over 16 million for every percentage increase in the real prices of staple foods. That means that 1.2 billion people could be chronically hungry by 2025 — 600 million more than previously predicted.
Even if their estimate doubles the real damage, such an increase in world hunger would still be staggering and unconscionable. Anecdotal evidence suggests that it is happening already.
Some, including President Bush and Sen. Chuck Grassley (R., Iowa), continue to defend ethanol, offering other reasons for the increase in food prices. But even if there is more than one factor contributing to today’s high grain prices, ethanol is a huge part of the problem — and the only part that Congress can fix overnight.
A History of Subsidy
Corn ethanol would not exist at all without Uncle Sam. The handouts began with ethanol tax credits in the Energy Tax Act of 1978. It was an attempt to solve two problems at once: our vulnerability to oil shortages and corn prices that had been depressed by our agricultural subsidies. In 1980, a punitive tariff of 50 cents per gallon was laid against ethanol imports (the rate today is 2.5 percent plus 54 cents). This and government sugar-price supports and tariffs guaranteed that American corn would be the only cost-effective feedstock for ethanol. Ethanol producers also became eligible in 1980 for government-guaranteed loans for up to 90 percent of their construction costs. (By 1988, the government had lost $352 million in defaults.) The government provided other assistance as well — R&D funding, for example.
Government help was a windfall for ethanol: Production shot upward from 20 million gallons in 1979 to 750 million gallons by 1986. In 1990, a tax credit of ten cents per gallon was created for small-capacity ethanol producers. In the same year, Congress mandated the use of oxygenated gasoline. The subsequent downfall of MTBE boosted demand for ethanol, a rival but less cost-effective oxygenate, so that production surged to 3.6 billion gallons by 2004.
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