Article: The Next Enron; Ethanol Subsidies

The "Doublemint" Effect of Public Policy
by Bill Burkett

The 51 cent per gallon direct subsidy for ethanol; and the secondary tax credits and benefits for ethanol give an unfair advantage to investors, not consumers within the fuel versus food debate.

In fact, the idea that Americans would have to choose between these two provisions is proof that once again, the President, Congress and politics in general - "Big Brother" - if you will has once again stepped in and upset the natural balance of production between agricultural sectors and consumers. Playing the base consumer from both directions creates the necessary leverage for government interaction - a false shortage.

It's a novel idea that those who most lobby and therefore control government policy would use farmers and environmentalists, hand in hand to again raid the treasury and bilk the American consumer. Novel or not, it's making it possible for entire ethanol plants to be completely paid for within sixteen months just from the subsidy itself. Mid-sized plants are raking in well over $100,000 a day just in the subsidy itself.

This is the "next generation" Enron; according to several leading economists; for it again uses false energy shortfalls to create a fervor followed by enormous federal investment straight into the accounts of the richest of Americans. In the process, it also bilks consumers at least twice - the Doublemint effect.

Agriculturists from all sides now wager more on whether the US Corn Growers and the Cargills and ADMs have now co-opted the re-writing of the next farm bill to make these provisions a tax action in perpetuity; once again favoring and paying gross sums of money directly into the coffers of those least in need of them to get them to do things they would have done anyway.

More than one study on the production of ethanol from corn and grain sorghum - feedstocks - have concluded that energy consumed is at par (or approximately equal) to energy produced within the conversion of corn starches to ethanol. And while we hear one expert after another say this was so in the early days, but he efficiencies have changed; we wonder how a marginal system of production can be so subsidized to create alternative energy sources. And while environmentalists have been recruited to talk of the ozone effect, other environmentalists speak of the negative effects to pollution of soil and water. The scientific debate continues; unlike the debate on wind and solar powered technologies where the conclusions are near unanimous.

I know a little about the industry and the economics of ethanol, having left the Economic Development Administration family; becoming a consultant building ethanol plants throughout the Midwest in the early 80s.

In the latter 70s and early 80s, there was a subsidy as well. But the subsidies lacked the political glitz and glamour that senior conglomerates within the ethanol industry have been able to muster this time around. In fact, the Mark Andreas's of the World at ADM have enlisted the active support of the American Corn Growers to build a grossly inflated subsidized pricing structure, largely paid for by extreme lobbying efforts of the industry.

Certainly, this is price fixing at the most strategic levels, for it uses government - public subsidies to camouflage the creation of a false market.

Numerous economists and bankers now say that without the 51 cent per gallon subsidy, the current break even for corn used within ethanol production would be about $2.80 per bushel. I've heard as high as $3.09 on the extreme. Pork producers point out that for every rise of 10 cents in the price per bushel of corn, their costs increase by $1.00 per hundredweight produced.

With a fair market break even corn price of $2.75 (as compared to today's $3.97 price) we can see that the price of production of pork products - ham, bacon, sausage and ribs moves up by over $30 per head and therefore increases the retail premium price at the meat counter for pork by over thirty cents a pound.

Because of the feed conversions of pork versus cattle, the effect is a little over twice as great with beef. We haven't considered the price of milk and dairy, but the effect carries there too.

The industry's response is that the process of ethanol production only uses the starch from the corn to produce ethanol. But it's the starches within corn that primarily produces the growth and caloric production that makes quality pork, beef and dairy products on the shelf. If it wasn't so, animal nutritionists wouldn't provide a suggested maximum content of the total animal ration of 40% of distiller's dried grains (DDG) and distiller's dried grains and solubles (DDGS) within the diet. And nutritionists and veterinarians wouldn't constantly warn of the imbalance of Thaimine to cause Polioencephamalicia (PEM) when DDG and DDGS is used to higher percentages. This claim is a public relations escape to deny that there is now a "food versus fuel" debate at all; a claim without validity.

The exact figures of this debate are really not what's important within this discussion.

The basic principle that once again taxpayers are ripped from both ends shows the violation of principle here.

On the one hand we pay an exaggerated price for fuels; while paying a cash subsidy into the coffers of those investing in ethanol production - the upper 10% primarily; while increasing the food costs of the consumer as well.

Taxpayers without protections are the base consumers who have their heads down working to try to survive. It's the middle and lower 85% who again pay the tab; and in this case, who pay it twice.

The 85% working Americans who are the paying consumers and taxpayers as well obviously didn't have a seat at the table when the lobbyists for ADM, Cargill and the US Corn Growers got this one through and into speeches by President Bush; his budget authority, State of the Union and the approval of a Republican Congress.

Once again, double your pleasure is a cliche that can only be celebrated by the takers. Getting screwed twice on the same issue isn't "pleasure" or principle.

I'm Bill Burkett, and that's the way I see it as a consumer, an economist and a farmer.