A Growing Disaster

By RUSSELL HARDING
NYT

Midland, Mich.

THE ethanol industry, once the darling of corn growers, environmentalists and the auto industry, has fallen on hard times. Producers spent this year caught between falling ethanol prices and rising corn costs, causing many to go bankrupt. In response, they are pushing the Environmental Protection Agency to increase the amount of ethanol they can blend into gasoline to 15 percent, up from the current 10 percent. Allowing this, however, would only double down on a discredited environmental policy without solving the industry’s fundamental economic problem.

That problem is simple: Ethanol prices trend higher and lower along with the price of gasoline, yet the cost of producing ethanol tends to rise with demand, since higher ethanol production exerts upward pressure on the price of corn. In a free market, corn prices might be expected to eventually fall as the market adjusts to increased demand. But because the government heavily promotes ethanol use through subsidies and regulation, the market is continually strained.

The problem is magnified because corn is a water- and fertilizer-intensive crop that requires considerable investment. Worse, since fertilizer is often an oil-based product, the cost of growing corn tends to rise at the very moment ethanol prices, which rise with oil prices, might bring a good return.

The ethanol industry has less incentive to control its costs and diversify its market as long as the federal government guarantees it a place at the pump. Yet Congress’s solution to the plight of ethanol suppliers has been to mandate more ethanol use in gasoline. The Energy Independence and Security Act of 2007 mandated that use of renewable transportation fuel rise from nine billion gallons last year to 36 billion gallons in 2022. Although some of this mandate must be met by advanced biofuels from switchgrass and other sources, corn-produced ethanol is the only large-scale alternative fuel currently available to meet Congress’s mandate.

(More here.)

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