Senate Hearing Questions Use of Ethanol Subsidies

Testimony less supportive of ethanol than many had hoped.

Published on: May 8, 2008

Tuesday the Senate Committee on Homeland Security and Government Affairs held a hearing on fuel subsidies and the impact on food prices. In opening remarks, Sen. Joe Lieberman, said "we've met the enemy and it's us" stating the good intentions of last December's energy bill calling for five-fold increase in ethanol production may have caused a bad consequence of rising food prices.

Bruce Babcock, director of Iowa State University's Center for Agricultural and Rural Development, testified to the committee that the best approach to current ethanol subsidies, the blenders credit, the renewable fuels standard, and the ethanol import tariff, would be to eliminate all three. In an answer to questions from senators, he said doing a piece meal approach of addressing each subsidy separate, the effects of prices are much lower. Because the blenders' tax credit and mandate both serve to increase the demand for ethanol, elimination of only one of these policies would have little impact. Babcock said the 6 cent reduction in the blenders credit currently proposed in the farm bill provides budget savings, but would virtually have no impact on the price of corn, taking them down only 4 cents. Taking off the blenders credit would have a modest effect, he said. If all three were eliminated corn prices would drop by almost 13%, to just below $5 per bushel.

Mark W. Rosegrant , director of the Environment and Production Technology Division at the International Food Policy Research Institute, testified that if biofuel production was frozen at 2007 levels for all countries and for all crops used as feedstock, maize prices are projected to decline by 6% by 2010 and 14% by 2015. Smaller price reductions are also expected for oil crops, cassava, wheat and sugar.

High gasoline prices combined with existing ethanol plants means that corn prices in the near term will remain well above historical levels even if the mandate, the blenders' tax credit, and the import tariff were all eliminated, Babcock said. "This is not to say, however, that the 13% drop in corn prices would not affect livestock margins and, eventually, food prices. This drop in corn prices would reduce the cost of feeding beef cattle by 5% of revenue, hogs by 7% of revenue, laying eggs by 4%, and dairy cattle by 3% of revenue. This drop in production costs would eventually translate into consumer prices that would be lower than they otherwise would be," he testified.

Rosegrant said it was important to find ways to keep biofuels from worsening the food-price crisis, and a reduction in mandates and elimination of subsidies for biofuels production would contribute to lower food prices. But even more critical to addressing the situation would be to increase agricultural productivity growth, for instance through biotechnology, improve developing-country policies and infrastructure related to the storage, distribution and marketing of food. "These factors will continue to drive the future health of the agricultural sector and will play the largest role in determining the food security and human well-being of the world's poorer and more vulnerable populations," he said.

Source: Feedstuffs