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The Ethanol Chickens Come Home to Roost

After a year full of victories for big government legislation in Congress, the forces of statism seemed to have met their Waterloo with the farm/food stamp bill.  The more people learned of the profligate food stamp spending and the market distorting, risk-inducing agriculture programs contained in the bill, the more they spoke out against this monstrosity.  Speaker Boehner has refused to bring the bill to the floor so far.

Seeing their political stock rapidly diminish, the bipartisan coalition of government-run agriculture took a page out of Rahm Emanuel’s playbook and decided not to let the crisis of the summer drought go to waste.  They are using evocative imagery of dead crops and the fear of higher food prices to shove this $957 billion behemoth through Congress.  Amazingly enough, the Washington Post of all news outlets has injected some much-needed clarity into this narrative:

But keep the potential hardship to producers and consumers in perspective. “U.S. farmers face this drought in their strongest financial position in history, buoyed by less debt, record-high grain and land prices, plus greater production and exports,” reported Christine Stebbins of Reuters, after a thorough canvassing of industry and government experts. Farm losses should be far smaller than those suffered in the last big drought 24 years ago.

In fact, the Agriculture Department estimates that government-subsidized crop insurance covers more than 80 percent of farmland planted with major field crops — at least two of which, wheat and cotton, appear pretty much unaffected by the dry weather anyway. Dairy farms are the least likely to be in drought-ravaged areas, the USDA reports. And many of them enjoy federally subsidized insurance against rising feed costs. […]

And before Congress rushes through the farm bill, it’s worth reflecting on all the ways existing policies worsen the drought’s impact. More corn would be available for animals if not for federal ethanol mandates. One reason for drought- and flood-related crop losses is that federally subsidized crop insurance encourages farmers to cultivate marginal land and engage in other risky practices, knowing that taxpayers will, in effect, bail them out. Both the House and Senate versions of the farm bill would increase subsidized crop insurance, thus accentuating this moral hazard.

I’m not sure whether the Washington Post is only supportive of urban welfare or whether they stumbled upon a random appreciation for market forces.  Either way, they are 100% correct.

Undoubtedly, a severe drought is going to bring some pain to both farmers and consumers.  There’s no way around that.  However, commodity prices are higher than ever, farmers are richer than ever, and most of their losses will be covered by existing crop insurance.  If government would stop subsidizing overly risky behavior, that insurance could be administered by the private sector.  But the single most damaging factor in distorting the crop market, particularly the corn crop, is the government’s ethanol policy.
Over the past decade, ethanol has been the poster child for the worst aspects of big-government crony capitalism.  The ethanol industry has used the fist of government to mandate that fuel blenders use their product, to subsidize their production with refundable tax credits, and to impose tariffs on more efficient sugar-based ethanol from Brazil.  These policies have distorted the market for corn to such a degree that 44% of all corn grown in the country is diverted towards motor fuel blends.  If we would literally flush half the corn harvest down the toilet, we would be better off than using it to make our motor fuel less efficient.

Thankfully, we have rid ourselves of the 45-cent per gallon Volumetric Ethanol Excise Tax Credit (VEETC) and the 54-cent-per-gallon import tariff.  Although the farm bill grants more subsidies through the Biomass Crop Assistance Program – a program in which the taxpayer provides up to 50% of a farmer’s expenses used to plant biomass crops.  But the most egregious part of the three-legged ethanol beast –the mandate – is still intact.  There is no worse form of tyranny than using the boot of government to force consumers to purchase a particular product.  It is especially egregious to make our corn crop so scarce during a time of drought.  We should have an abundance of corn from US Reserves, but the ethanol boondoggle has drained out our bountiful harvests.

If supporters of centrally-planned agriculture want to use the crisis to push through a massive farm bill, most of which goes towards the food stamp program, we should use it to eliminate the ethanol mandate.

Cross-posted from The Madison Project

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