Putting the RFS genie back in the bottle
Industry representatives predicted that mandates for the subsidized use of corn to make ethanol would distort market forces and would lead to historically high grain prices when poor weather reduced supply.
Sometimes being right can be painful. The poultry industry is going through one of those times. Whenever the Renewable Fuels Standard (RFS) or ethanol subsidies have been discussed, NCC, NTF and other animal agriculture groups have asked Congress not to put its finger on the scale and to let market forces determine how large the ethanol and biofuels industries in the USA would become. Poultry industry executives, economists and NCC and NTF representatives predicted that mandates for the subsidized use of corn to make ethanol would distort market forces and would lead to historically high grain prices when poor weather reduced supply. Unfortunately, Congress didn't listen and people in the poultry industry were right. Now, with corn over $7 per bushel, the poultry industry, other animal agriculture groups, some environmental groups and advocates for hungry people around the globe are trying to see if they can get the RFS genie back in the bottle.
Texas Gov. Rick Perry filed a petition asking the U.S. EPA for a 50-percent reduction in the RFS. The comment period on this petition ended June 23.
Economic studies by Dr. Thomas Elam of FarmEcon LLC, and Keith Collins, former chief economist of the USDA suggest that the federal ethanol mandates have accomplished little beyond increasing corn prices to record levels, increasing food prices and contributing to worldwide shortages of staple foods. Both of these studies can be found at www.foodbeforefuel.org.
"The 2008/2009 increase in fuel production made possible by the RFS is almost too small to measure against the global energy market, but the effects on food prices and security are huge," Elam said. "The U.S. government should re-examine and reduce the RFS in light of the damage it can do to our food production capacity and the overall welfare of the country." Elam's study concludes that ethanol actually has had little effect on gas prices only about 4 cents per gallon.
A recent Goldman Sachs analysis predicted that 2 to 4 million acres of corn may be lost in the wake of the Midwest flooding. The USDA is expected to provide a detailed estimate of losses in the coming weeks and has already revised down its expected crop yield data. This flood damage makes reduction of the RFS even more critical. Elam's study, Biofuel Support Costs to the U.S. Economy: The Key Role of the RFS in a Feedstock Shortage Scenario, investigates two distinct scenarios: one in which there is crop damage and the RFS remains in place, and one in which there is crop damage but the RFS mandate is reduced by 50 percent. "Maintenance of the current RFS schedule in the face of a smaller 2008 corn crop will be devastating to meat, dairy and poultry producers," Elam wrote. "Consumers will suffer as food and fuel costs rise and supplies of corn-based foods diminish. The overall economy will be damaged from higher inflation and lost jobs in the food production sector."
Collins' study, The Role of Biofuels and Other Factors in Increasing Farm and Food Prices, indicates that unless the RFS is suspended or revisited, U.S. grain stocks already pushed to dangerously low levels will fall even further as ethanol consumes a larger share of the dwindling corn supply.
"Government support for corn-based ethanol ensures a permanent, significant, and increasing demand for corn," Collins said. "These policies interfere with the normal price rationing function of markets when supplies are short such as in 2008, with production being reduced by flooding and excess moisture. In this short-crop environment, biofuels policy, including mandated use of ethanol, causes even higher corn prices, shifts the demand adjustment burden to non-ethanol users of corn--particularly the livestock sector--and puts continuing pressure on food prices."
Reducing the RFS by half would bring down the price of corn by $2.25 per bushel, Elam argues, saving more than $9 billion in feed and food costs. The average cost of a ton of soybean meal would fall by $150, saving over $5 billion.