Rush to Biofuels Fraught with Great Risks

The rush to subsidize ethanol and other biofuels is certain to cause problems.  Among these are making U.S. fuel consumers overly dependent on Mother Nature, undermining the domestic livestock sector, and raising food prices around the world.  Before further incentives are provided for biofuels, U.S. policymakers need to more carefully consider the ramifications of doing so.

U.S. policy makers are making a huge risky bet on ethanol. In their efforts to make the U.S. less dependent on the unreliable petroleum suppliers in the Middle East, Africa, and Venezuela, they are making U.S. gasoline consumers much more dependent on an even more unpredictable factor – Mother Nature. In some future year there will be bad weather in the Midwest during the growing season and corn production will be sharply reduced. This will lead to a spike in corn and ethanol prices that will cost U.S. motorists billions of dollars.

The corn-based ethanol industry also threatens to greatly undermine the U.S. swine and poultry sectors through sharply higher feed costs. The ethanol tax exemption effectively provides about a $1.50/bushel subsidy to use corn to make ethanol rather than to feed it to livestock. This puts the swine and poultry industry at a major disadvantage. The ethanol tax exemption needs to be eliminated so the animal production sector has equal access to corn.

The ethanol industry as well as the subsidized biodiesel sector also promise to greatly increase global food costs. This may not be a major problem for consumers in the U.S., Europe, and other developed countries, but it will be a major problem for the more than 2 billion people in the world who live on less than $1/day. Already Mexico is concerned that rising corn prices have driven up tortilla prices in Mexico by over 25%. This week Argentina raised its export taxes on soybeans by 4 percentage points to raise money to subsidize consumers faced with rising prices for bread, meat, milk, and eggs. The export tax increase also is aimed at getting Argentine farmers to raise more wheat and corn and less soybeans.

I suggest it is time for federal policy makers to take a break and carefully consider all of the ramifications of the rush toward biofuels. Otherwise they may find that the unintended consequences of biofuels subsidies and mandates will create problems far worse than imagined.