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Drought Sparks Battle Over Ethanol Quotas

Three big intertwined but rival agribusinesses — corn farmers, meat and poultry producers, and biofuel refineries — are in a political fight to protect their interests as a drought ravages corn producers and industrial consumers alike.

AP

At issue is whether to suspend a five-year-old federal mandate requiring more ethanol in gasoline each year, a policy that has diverted almost half of the domestic corn supply from animal feedlots to ethanol refineries, driven up corn prices and plantings and created a desperate competition for corn as drought grips the nation’s farm belt.

Meat producers are demanding that the Obama administration waive the ethanol quota to ease rising feed prices. But ethanol producers worry that the loss of the quota will undermine the ethanol industry and do little for corn farmers but drive down the price of their stunted harvest.

The meat industry, backed by several governors, lawmakers and even international food agencies, argues that the quota has distorted grain markets by sucking up corn when ranchers can least afford it.

But the ethanol industry says that its corn consumption is down 12 percent since the start of the summer and that weekly ethanol production is at a two-year low. As corn prices have risen, refineries have scaled back production, idled dozens of plants and sold ethanol inventories. As a result, the industry may consume 10 percent less of this summer’s crop than last year’s, government and industry officials said.

“The market is already responding to the reality of this drought,” said Agriculture Secretary Tom Vilsack, a former Iowa governor who supports the quota, citing the recent decline in ethanol production.

Meat and poultry producers countered that the government was still “picking winners and losers,” and urged the Obama administration to “let the market work and embrace free market principles,” as J. D. Alexander, president of the National Cattlemen’s Beef Association, put it when he announced a petition to waive the quota two weeks ago.

Four governors, dozens of senators and scores of House members have petitioned the administration to waive the standard.

Corn growers, caught in a political tug of war between their biggest customers, are asking the government to move cautiously, if at all. (Many ethanol refineries are owned by corn farmers.)

“We have great concern and empathy for not only our members who are suffering, but all who we supply,” said Garry Niemeyer, president of the National Corn Growers Association, in a statement on Wednesday. “This includes the domestic livestock sector, our export customers, the domestic food industry and the ethanol industry.”

The corn farmers said a waiver should be allowed only if careful study showed a severe economic impact.

President Obama "is a strong believer in ethanol."

The Obama administration seems inclined not to interfere. The president “has been a strong believer in ethanol,” a spokeswoman, Jennifer Psaki, said during Mr. Obama’s trip to Iowa this week. “He absolutely believes in it — he thinks it’s a driver of the economy here and a key component of renewable energy.”

Mr. Vilsack was even more forceful in a speech in Omaha to a conference of the American Coalition for Ethanol last week, just as his agency released a dire new crop forecast.

He urged ethanol advocates to fight back against opposition to the fuel quota, calling it “a concerted, well-financed, organized and strategically thought-out campaign against this industry.”

“There are members of Congress who have publicly displayed their support to the opposition,” Mr. Vilsack said. “There needs to be a corresponding set of politicians who stand up and say, ‘Wait a second — this is important to the country. This is a job creator.’ ”

Support for the ethanol industry, which blossomed because of a system of tax breaks followed by the fuel mandate, has long been bipartisan, and the current debate is split more along regional than partisan lines.

When Iowa’s agriculture secretary, William Northey, a Republican, accompanied Mitt Romney on a campaign visit to Iowa, they talked about the tensions over corn and ethanol. “My point was, right now the market is working,” Mr. Northey was quoted by The Des Moines Register as saying. He added that with corn prices high, “ethanol plants are slowing down because their margins are not as good.”

Indeed, a number of ethanol refineries reported losses this week for the most recent fiscal quarter, citing rising prices as a result of the corn shortage.

The industry fears that whatever stability the mandate provides would vanish if it were waived, even temporarily.

The renewable fuel standard requires more than 13 billion gallons of ethanol to be used in gasoline this year and nearly 14 billion gallons to be used next year — the equivalent of nearly 5 billion bushels of corn each year.

On Aug. 10, in a sharply reduced forecast, the Agriculture Department said the corn crop would be the lowest in seven years. The news drew worldwide attention, and corn prices hit new highs. But another statistic was barely noted, except by specialists: the department predicted that the use of corn by the ethanol industry would also decrease 10 percent in the forecast year, to 4.5 billion bushels.

From July to August, as they observed the drought’s effects, government inspectors reduced their forecast of corn used for ethanol in the year by 400 million bushels. The forecast of corn used for livestock feed declined by 725 million bushels as ranchers culled their herds and flocks.

The ethanol industry is quick to point out that about a third of the corn it uses is converted not to ethanol, but to highly nutritious livestock feed, including a byproduct known as distillers grains. Taking that into account, the group said, the amount of corn that goes to animals will decline 13 percent this year, and the amount that goes to vehicles will drop 8 percent.

Whatever ripple effects are felt in food or gasoline prices, a group of Purdue University economists said on Thursday as they presented a study of a possible waiver, the drought has already done its economic damage. The only thing policy makers can accomplish, the economists said, is to distribute the harm across the various affected sectors.