Food vs. Fuel and the Midwest Drought

It was bound to happen. As long as US corn output continued to climb year after year, the federal mandate to blend steadily increasing quantities of ethanol into gasoline could be accommodated without creating a shortage of this staple grain. Unfortunately, crops are subject to all sorts of uncertainties, including the severe drought conditions that the middle of the country is experiencing this year.  Estimates for this year’s corn crop have been revised downward, and corn prices have already broken through $8 per bushel, up from less than $6 a month ago, with consequences for the livestock, processed food and ethanol industries, as well as for export markets.  As soaring feed grain prices begin to translate into higher grocery prices for meat, poultry, dairy and other goods, will consumers demand relief from the EPA, which has the authority to curtail ethanol volumes?  The current betting appears to be that the administration will stand fast on the mandate, but anything can happen in an election year.

Ethanol now accounts for at least 10% of US gasoline blending, by volume.  To meet that demand, ethanol producers will require around 5 billion bushels of corn.  In recent years, the ethanol industry’s expanding corn demand was met by a combination of increasing yields and planting more acres in corn.  However, corn yields per acre are dropping sharply this year, potentially pushing output below last year’s 12.4 billion bushels, if conditions don’t improve soon.  That’s in contrast to earlier expectations that this year’s corn crop would exceed last year’s by 20% .  This isn’t the first time that the food vs. fuel trade-off inherent in crop-based biofuels has become an issue, but it might be the first time when both the demand for corn for ethanol is so high and the need for that ethanol in the gasoline blending pool is arguably so low.  In this context, food vs. fuel quickly boils down to a debate over the tangible benefits of corn-based ethanol as a fuel.  There’s growing evidence that those benefits have been oversold, despite industry claims.

Start with the widely touted study from Iowa State University indicating that ethanol saved consumers $1.09 per gallon at the gas pump in 2011 and $0.89/gal. in 2010.  I read both the original study and its updated version when they came out.  It seemed obvious to me that the authors’ grasp of gasoline markets and oil refining were inadequate, but I lacked the time necessary to dig through their math to uncover the source of their exaggerated results.  Fortunately, a pair of researchers from MIT and my alma mater, U.C. Davis, have now done that work and concluded that the Iowa State paper’s findings–and the claims based on them–depended on a “spurious correlation“: the relationships they saw were coincidental.

In contrast to the Iowa State studies, the MIT/Davis paper is very readable, and I recommend it to you.  In addition to debunking the statistics, the authors point out the key flaws in their counterparts’ logic.  Foremost among these is that in order to have a large influence on gasoline prices, ethanol would have to have had a large impact on crude oil prices, which are the largest determinant of gas prices, by far.  From 2005-11 US ethanol production expanded by 10 billion gallons per year, the energy equivalent of 350,000 barrels per day of oil, or 0.4% of 2011 global oil supply. I’ve argued many times that the oil market responds disproportionately to modest changes in supply and demand, but the idea that a few hundred thousand barrels per day could translate into the equivalent of $45/bbl exceeds the wildest dreams of any trader I ever met.  The MIT paper concludes with the authors summarizing the likely impact of ethanol on gasoline prices as “near zero and statistically insignificant.”

However, if ethanol hasn’t done much to hold down gas prices, could a drop in US ethanol production resulting from paring back the ethanol mandate to reduce the pressure on corn prices cause a big spike in gasoline prices?  That’s where the analysis in a paper presented to members of Congress yesterday comes in.  Dr. Elam’s report suggests that rather than displacing imported crude oil, the main effect of increasing US ethanol use in fuels has been to divert domestic gasoline production into exports, while US crude imports have fallen based on a combination of lower demand (from the recession) and improved product yields per barrel of crude oil refined.  Even if you are inclined to be skeptical of these findings because the study was supported by poultry interests, data from the US Energy Information Agency and elsewhere show that US refineries are not fully utilizing their capacity, are exporting significant volumes of gasoline, and have a wider array of domestic and imported crude oils at their disposal than they did just a few years ago. In short, we’re in a far better position to forgo a few billion gallons of ethanol this year than we would have been in 2008, the last time food vs. fuel concerns spiked along with gas prices.

Corn growers have experienced droughts before, and in the past the price of corn sorted out who needed it most.  However, the market can’t prioritize fairly among the competing calls on a drought-diminished corn crop when the single largest segment of demand is locked in place by a federal mandate. This represents a massive distortion that only the government can rectify. I’m sympathetic to the ethanol industry’s dilemma.  After all, the federal government virtually begged them to overbuild capacity, but it couldn’t guarantee they would earn a profit, even when it was providing a $0.45/gal. subsidy for their customers, who are required by law to use their main product.  However, the economic and environmentalbenefits of ethanol are too modest to shield this industry while forcing all other corn users to absorb the likely shortfall in corn supply.  The most sensible remedy would be to unshackle ethanol demand, at least temporarily, and waive at least a portion of the ethanol mandate for 2012-13.

7 Comments on "Food vs. Fuel and the Midwest Drought"

Kenz300 on Sun, 22nd Jul 2012 3:15 pm 



Over population is the elephant in the room. Endless population growth is coming head to head with the worlds limited resources.

Every country needs to develop a policy to balance its population with its resources. Those that do not will be exporting the populations and their problems.

Every problem — food, water, energy, jobs are all made worse and harder to solve with the growing population.

Gilles Fecteau on Sun, 22nd Jul 2012 4:54 pm 



I fully agree with Kenz300 on the subject of over-population. However, we must also address the excessive meat consumption in the west. Most soy and much corn goes toward animal feed. It takes 10 time the land resources to provide animal protein versus vegetarian protein. We could easily solve the world nutrition problem if everybody went vegetarian.

DC on Sun, 22nd Jul 2012 5:45 pm 



Corn-eth is a massive scam. Its not even a fuel. 1 barrel of fossil fuel to produce one barrel of bio-fools, with only 70% of the energy of the barrel that made it in the 1st place. Then, the ‘fuel’ is simply mixed in with gold ol regular oil at a 1:9 ratio.

The result? Big Corn keeps making big bucks in the land of endless corporate welfare, amerika.

DMyers on Sun, 22nd Jul 2012 6:51 pm 



What about food versus fuel? How does a choice like that work? When do we have to make it? The question implies a few things: the word food is a euphemistic substitute for the word, starvation, and the question applies on a collective level.

The question is, would you starve, let your wife and children starve, you neighbors, friends, people in your community starve so that you could possess combustible? More than a hypothetical, this choice could face us for real in the very near future.

Will our instincts protect us from having to make a moral choice here? A starving human would have to choose food for survival. But what does one give up with combustible? Let’s say customary transportation and shipping, which may mean a loss of employment and access to food outlets and necessities; in other words, you starve either way. The will to survive will choose the way it won’t.

Okay, so a big point to the article is that for the moment there is a surplus of gasoline that is being exported. This gasoline could be diverted to the domestic market and fill the ten percent void from a removal of ethanol. I think getting rid of ethanol is an important objective, given its EROEI. If there exists this gasoline surplus to fill in for lost ethanol, and therefore not affect supply, then agreed, this is the perfect time to do it.

The available replacement for ethanol is only a temporary solution, if it exists at all. I assume that market fluctuations will wipe out the surplus to be exploited. When that is gone, we’ll be facing the question again, food or fuel? Pick your poison.

Kenz300 on Sun, 22nd Jul 2012 7:45 pm 



Where will the food come from for the next billion additional people and the billion after that? Endless population growth is not sustainable. Without addressing population growth there is no solution. The ever growing population overwhelms any other solution.

BillT on Mon, 23rd Jul 2012 1:39 am 



Remove ethanol from everything and go back to food for people, not machines.

Then tax gasoline and diesel heavily so that people are forced to adjust to using less. Say go to $5 and increase it by $1 per gallon for the next 5 years. At $10 per gallon, many changes would have been made and consumption would have dropped considerably.

Yes, that raises the cost of everything else, but that too is only proper. After all, Americans have been consuming 5-6 times their rightful share of resources for a long time and that is going to end one way or another.

Rick on Mon, 23rd Jul 2012 8:23 pm 



BillT you’re 100% correct.