Unintended consequences of biofuels policies
Government intervention brings consequences
We are all witnessing, in an up-close-and-personal manner, the sheer folly of government intervention in energy and other markets. Federal mandates, subsidies and tariffs will result in 15 billion gallons of corn-based ethanol used in U.S. vehicles by 2015. Prior to the onset of a worldwide recession last fall, corn and oil prices reached record highs in the summer of 2008, a year in which roughly 10 billion gallons of corn-based ethanol were produced.
What has all these billions of gallons of subsidized ethanol gotten us? Proponents would say that it has reduced the number of barrels of imported oil, led to the expansion of the ethanol industry (i.e., created jobs in the corn belt), reduced greenhouse gas emissions and increased farm incomes. Maybe it's just me, but I don't see a net benefit to the U.S. economy from expansion of an industry that exists solely because of subsidies, tariffs and mandates. The best way to understand this type of economic activity is to think of any industry that exists domestically solely because of import restrictions. Free trade benefits everyone; consumers pay more for goods because of restrictions on free trade. We all pay more to fuel our vehicles and the federal government borrows more money because of our ethanol policies.
Bushels more cash
Most in the poultry industry are painfully aware of some of the unintended consequences of the expansion of corn-based ethanol production. We all know about the additional billions of dollars that the industry paid for feed ingredients last year and will continue to pay for years in the future. Economists tell us that the days of $2 to $2.50 per bushel of corn are gone for good. But, other, less direct costs are playing out right now before our eyes.
Quarterly reports from both Pilgrim's Pride and Tyson over the last six months have laid out in painful detail how the run-up in grain prices last year tempted both companies to dabble and lose big on grain futures contracts. Tyson has weathered this storm but Pilgrim's Pride was driven to Chapter 11 bankruptcy.
As part of Pilgrim's Pride's bankruptcy reorganization, the company has been forced to close four of its plants. Thousands of employees and hundreds of contract growers were affected by these production cutbacks. Some might say that you can't lay all of the blame for these closings at the doorstep of the government's ethanol policies, and that other factors certainly played a role, but is this the kind of rural job activity that renewable fuels are supposed to stimulate?
I'm from the government and I'm here to help!
But all is not lost. The government is back on its white horse, coming to the rescue. As this column goes to press, it is likely that the state of Louisiana will contribute $40 million to Foster Farms' purchase of Pilgrim's Pride's idle Farmerville complex. The state will also match Foster's investment in new equipment for the Farmerville operations up to $10 million. Another group of investors is trying to garner financial support from the state of Arkansas to purchase Pilgrim's Pride's El Dorado complex.
There is nothing new about government financial support, both in the form of loans and outright grants, given to investors or growers to reopen idled processing plants. This has happened on numerous occasions in the past.
However, the economic conditions that caused the closure of these facilities in the first place usually couldn't be traced back to an earlier government program. In the current situation, we can chalk up the hundreds of millions of government expenditures that will go into reviving these plants as just another unintended consequence of our country's corn-based ethanol mistake.
I wish the best of luck to all of the employees and growers who are affected by this latest round of plant closings. I hope that the assets that now sit idle will soon be put to productive use. I also hope that poultry operations revived with government financial help don't wind up outcompeting unsubsidized operations to the extent that some of these fail. If this happens, where does it end?
One last thought. Many banks now wish they hadn't taken TARP money and I am not sure that General Motors and Chrysler are happy about the "help" that Uncle Sam has given them. There seems to be a lot more strings attached to that government money than there used to be.