All things considered – April 2012

The thing about the great ethanol debate is that everyone involved is behaving rationally (although policy makers may be the exception).

That doesn’t mean the ethanol policies make sense, but that everyone is arguing their own self-interest.

In general terms, grain producers like ethanol because it increases demand and raises prices. Ethanol producers like current policies because they are encouraged to produce and are back stopped by mandates and subsidies. Livestock producers hate them because they raise feed prices, increases production costs and make it hard to turn a profit.

There are others involved in this debate including environmentalists who tend to like grain ethanol because it is a bit less polluting than oil and politicians who like it because grain farmers and the ethanol industry like it.

In February, the George Morris Centre threw another log on the fire in this great debate. The think-tank released a study that essentially concluded Canadian policies that encourage the conversion of grain to ethanol raise feed grain prices and are bad for the meat industry.

This report is detailed and provides figures quantifying the impact of ethanol on meat production, but thematically it is similar to several reports produced by George Morris over the last few years. In general, it is clear that the George Morris Centre supports Canada’s meat industry and believes Canada’s ethanol policy is stupid.

Predictably, the grain producers and the ethanol industry hated the study and debate raged for a few days.

The problem with the debate is that, while everyone in it is arguing rationally, the whole thing is absolutely loony tunes.

First, corn isn’t even close to being the best feedstock for ethanol — that honour goes to sugarcane. Second, Canada is a net importer of corn. Third, Canada imports its corn from the United States, which has its own ethanol policies that inflate its corn prices.

A rational policy would seem to entail getting ethanol from the most cost-efficient source and the one that offers the greatest environmental payoff.

The most cost-efficient sources for ethanol are Brazil and the Caribbean basin where sugar cane is produced and where more sugar cane could be produced. The production of ethanol from sugarcane, according to a variety of studies, costs 25 to 50 per cent less than ethanol from corn.

On the environmental side, sugarcane is an extremely efficient photosynthesizer, absorbing four to five times as much carbon dioxide as corn.

The problem with sugarcane, is that it doesn’t grow in great enough quantities in the United States, while corn does.
In the U.S., ethanol was, at first, a seemingly rational solution to a long-standing problem — low-priced, surplus grain. Until the early years of this century, the United States had more grain than it knew what to do with. The economic imperative was to get rid of the stuff and the political imperative was to do it in a way that didn’t hurt grain producers and the states in which they live.

In response, the U.S. used a mixture of export subsidies, farm supports and land set-asides. The results were that export subsidies occasionally got so high that buyers were getting grain for little more than the cost of transportation, farm subsidies reached the point where they represented all net farm income and millions of acres were taken out of production. Behaving rationally, the U.S. government looked for a better way and settled on ethanol as a small domestic answer to imported oil. While the costs of supporting the industry were high (in the form of subsidies, tariffs and tax breaks), the total was significantly less than the cost of export subsidies plus farm support.

The program succeeded in wiping out the troublesome grain surpluses. In fact it worked so well that corn prices have surged to the point where supplies became tight and the U.S. livestock industry and other users of corn started screaming and prices for meat started rising.

Consumers ended up supporting ethanol on their drive to the butcher shop and paid again once they got there. While there are many other factors at play, not the least of which is a slow U.S. economy, fuel consumption and meat consumption in the U.S. have fallen.

Canada’s ethanol policy follows the U.S. and is accurately described by George Morris as “me too.”

So what we have is a policy designed to get rid of U.S. grain (corn) surpluses that was copied by Canada, which is a net importer of corn. It is sold as an environmental policy when there are much better alternatives (sugarcane, or more extensive public transit or fuel-efficient vehicles). And it is costing both taxpayers and consumers.

But no matter how flawed, the policy is now so heavily defended and so politically entrenched that it will take more than a few critical studies to end the lunacy.