Ethanol, the Drought, and Bureaucratic Distortions
By Dave Swenson
All politicians tell whoppers. Their loyal delegates tell whoppers, too. But when an executive of a federal agency tells one, someone usually calls that person on it.
Not so with USDA Secretary Tom Vilsack, the former governor of Iowa. As he’s barnstormed the drought stricken Midwest and Plains of late bemoaning the absence of a farm bill most especially in light of the dire circumstances livestock farmers find themselves in, he has the opportunity to advocate for agriculture and to serve as both a leader and an educator. By my measure he has failed miserably on two counts and not been called to task by the media or the public.
Sure, the drought has driven up grain prices, but no, that will not have a huge impact on food costs, is one example of his message. If annual food inflation is between 2.5 percent and 3.0 percent, we should expect no more than a percentage point or two increase in our food bill as a result of the drought, he says, even though current corn, soy bean, wheat, oats, and barley prices are at historically high levels. The message is clear: this drought is devastating, but the average consumer really won’t feel the effect.
Give me a break. The high grain prices have led to tight margins for all animal producers forcing them to sell off their herds or to limit production. Over the course of the next year, everything that is made with grains and oil seeds and everything that depends on those grains for feed will cost more. If you eat things that have high grain and oil seed content your food prices will rise sharply. Cereals, oatmeal, all dairy products, poultry, cooking oils, and all meats will rise in price substantially. And importantly, the less processed the food, the more nutritious the form of the food, the higher the price rise. Averaging across all consumers and all foods is completely misleading. I eat whole grains, fruits, meats, and a very wide range of unprocessed foods, not Hot Pockets. My food bill will rise substantially.
When reporters confront Mr. Vilsack on the food price impact, he reacts assertively citing USDA research that makes his low food inflation case. When reporters query him on the call by animal producers to ease the ethanol mandate because ethanol uses 40 percent of the nation’s corn supply and has contributed to the great rise in feed prices, he swiftly asserts that upwards of 400,000 jobs are directly or indirectly dependent on biofuels production in the U.S., so by implication any fiddling with the ethanol mandate could have devastating job impacts.
There are not 400,000 jobs directly or indirectly tied to biofuels production, there is no USDA research supporting that figure, and Mr. Vilsack knows it. The USDA employs some of the nation’s premier agricultural and regional economists, but to get that huge number he had to go the Renewable Fuels Association (RFA), a trade group. That is his unofficial and easily discredited source for ethanol industry job impacts.
The actual numbers are easy to tease out. There are about 200 ethanol plants with about 45 jobs in each. That gives 9,000 jobs, give or take. Those plants need inputs. The corn had already been grown regardless of the ethanol industry, so it cannot claim any jobs associated with corn growing, but it can claim that it has strong technical and service supply linkages after it buys corn. Those linkages plus the jobs supported by worker household spending amount to another 30,000 jobs. In total, then, ethanol production in the U.S. accounts for about 39,000 jobs.
Easing the ethanol mandate would lower the demand for corn by ethanol producers, help moderate the rate of corn supply draw-downs, slow the rise in prices if not result in actual reduced prices for food and feed as we move into harvest, perhaps ease the plight of thousands of livestock producers, and soften the blow on the pocketbooks of millions of consumers. But Mr. Vilsack plays the job loss boogeyman to preempt any attempt to scrutinize the nation’s biofuels mandate. That trumps all of the above.
My research says that each billion gallons of ethanol produced in the U.S. legitimately supports about 3,300 jobs nationally. Vilsack asserts each billion gallons supports 33,000 jobs. The difference is ten-fold. Just one of us is telling the truth.
What I can’t square is Mr. Vilsack’s affection for make-believe ethanol jobs compared to his indifference to the job losses and distress that has already befallen animal producers and most certainly will befall consumers.
It is a very strange political calculus.
Dave Swenson is a long-time analyst of Iowa political, social, and economic issues. He is a staff research economist at Iowa State University and a community and regional economics analyst and educator. He also teaches planners (those nefarious agents of totalitarian control) how to do economic things in their profession at both Iowa State University and The University of Iowa.