farmgate: Ethanol Subsidies: Are They A Plus Or A Minus?
Despite many years of supply management farm policies that included target prices, loan rates, and deficiency payments, many farmers indicated they would rather get their income from the marketplace. For the past two years, that has happened. Or has it?
Early years of government farm subsidies were designed to not only keep farmers on the land, but to provide low cost food to the urban public. Compared to most other countries the US has maintained the lowest cost for foods, despite the run-up in food prices earlier this year. But agricultural economist Dermot Hayes and his colleagues at Iowa State University say farm income is still subsidized, it is just disguised a bit.
The Iowa State research investigates the relationship among farm income, federal subsidies, and public financial support for the ethanol industry. They define ethanol subsidies as:
1) The 51¢ per gallon blenders’ credit that will drop to 45¢ in January.
2) The Renewable Fuels Standard that requires increasing amounts of gasoline to contain 10% ethanol over time.
3) The 54¢ per gallon tariff on imported ethanol.
The researchers attempt to look at the overall ethanol, gasoline, and fuel market and determine the financial benefit of the subsidies, and then calculate the financial benefit to agriculture and energy industries.
Instead of criticizing the subsidies as many economists, they contend the blenders’ credit and the tariff on Brazilian ethanol are a wash, since any Brazilian ethanol would benefit from the blenders’ credit. Additionally, they say the ethanol mandate was the result of high energy prices and was an effort to offset them. As part of the ethanol demand benefits to corn growers, the researchers say there was a reduction in government price subsidies to corn and other crops as a result.
Included in their calculations is a $1.3 billion benefit for the US corn market from the current federal ethanol policy, but at the same time the government has saved $3.45 billion because it was not making loan deficiency payments, as it was in 2005 and 2006. In 2007, the financial benefit to corn, ethanol producers, gasoline consumers, and taxpayers was a total of $2.65 billion.
The Iowa State economists concluded that the US ethanol subsidy was positive when all of the pluses and minuses were totaled. And they say that is a surprise, because the first economic principle that applies to subsidies is that they will distort the market. One factor that helped was that US grain markets were not competitive prior to large scale ethanol production plants because of the farm program subsidies. They conclude the ethanol subsidies actually provide a positive benefit across several industries, and reducing the market distortion from farm program payments the distortion caused by the ethanol subsidies reduces the net effect.
Summary:
Economic studies of agriculture, and particularly subsidies, usually cast a negative light on the time-worn policy. However, considering the financial benefits received by corn growers in a variety of farm program payments, and at the same time looking at the financial benefits of the ethanol subsidies to agriculture, energy, and consumers, it is possible to say the US biofuels promotion policy has resulted in a beneficial program that has reduced outlay of farm program payments and boosted other industries and consumers.
Posted by Stu Ellis on October 21, 2008 12:56 AM to farmgate