Don’t impose wealth transfer on dairy producers

W. Cris Lewis, Professor, Department of Economics, Utah State University

Editor’s note: The authors of “Ethanol production increases risk for dairy producers” which ran in Progressive Dairyman (Issue 1) were invited to respond to Geoff Cooper’s ethanol opinion (story can be found here) and “Is ethanol the solution or the scapegoat?” written by Robert White (Issue 3). Their responses follow below.

In response to the letter from Mr. Geoff Cooper of the National Corn Growers Association, I offer the following response to the first few points that he makes. (Time and good sense simply do not allow for a response to every point that he brings up).

1. The $0.54 per gallon tariff on ethanol certainly is a barrier to trade. Any tax on an imported product is a barrier to trade. Invariably, such tariffs are designed to protect domestic producers at the cost of higher prices to consumers. The effect is to transfer income from consumers, including any livestock operation that uses feed grains as an input for production, to producers of the product being protected and those who provide inputs (such as corn) to those producers. There is no question that the ethanol tariff has done just that, as would be true for any other industry for which tariffs exist. This is basic Economics 101; no economist in the world would argue otherwise.

2. The subsidy of $0.51 per gallon does not offset the tariff in any way. Again, it amounts to another way of transferring income to ethanol and corn producers, this time from taxpayers at large.

3. If ethanol really can be produced for $1.50 to $1.70 per gallon, there is no need for the subsidy, and I would expect Mr. Cooper and others associated with the National Corn Growers association to join with Dr. Bowles and me in calling for an end to that subsidy, which clearly is a waste of taxpayer money.

4. That the ethanol price is below that for gasoline is prima facie evidence that ethanol must be less efficient than gasoline and/or that there are other problems associated with its use.

5. Mr. Cooper reports that the production of 170 million barrels of ethanol reduced our spending on foreign oil by $11 billion. He fails to address two things: how much of that amount would have returned to the U.S. as these foreign countries bought U.S. products and the deadweight loss (another term from Economics 101) associated with the resource misallocations arising from the subsidy on ethanol production and its mandated use.

Frankly, if ethanol production truly was efficient there would be no need for the tariff, the subsidy on domestic production and the mandated use of ethanol. Basic economic principles tell us that such interference in the free operation of the oil and gasoline markets has large economic costs and that, invariably, such costs always exceed the benefits that are transferred to the producers of the products – in this case, primarily large Midwestern corn farmers, many of whom were quite wealthy before the ethanol debacle and now are significantly more wealthy.

For example, let’s have Mr. Cooper tell us what has happened to farm income and farmland prices in Illinois and Iowa in the past few years. If those corn farmers really need the extra money, let’s just send them a check. It will be much less expensive to the taxpayer and consumer and will not impose a burden on the livestock sector. PD

Corn prices rise on the heels of government ethanol mandates

Tyler J. Bowles, Professor, Department of Economics, Utah State University

A spokesman for the ethanol lobby, Mr. Robert White, notes that corn prices are a function of a number of factors. By pointing out possible nonethanol contributors to higher corn prices, he wants to deflect attention away from the role of ethanol subsidies and the mandated use of ethanol on corn prices. Yes, there are other factors at play in the corn market, but the fact is that as the mandated use, production and anticipated production of ethanol have increased dramatically since 2005, so have corn prices.

Another interesting empirical fact: the price of the March 2008 corn futures contract was around $4.00 per bushel in early December 2007. The price of this same contract increased steadily thereafter and reached $5.00 per bushel by early January 2008.

What best explains this 25 percent increase in little over a month? May I point out that this rapid price increase corresponds to the weeks during which momentum started to build for and President Bush signed an energy bill that dramatically increased the renewable fuels mandate. I will let the Progressive Dairyman readers draw their own conclusions as to cause and effect.

Mr. White then goes on to complain about high oil prices. What is the “right” price of oil, Mr. White? Since you are in favor of government mandates to solve perceived problems, may I suggest a mandate to reduce oil prices: the government should mandate that we all ride mules to work. The cost to the typical American household and dairy farmer would be only slightly more burdensome than the U.S. ethanol program, depending upon the temperament of the mule. PD