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Time To Jettison The Ethanol Mandate

Now that the Iowa caucuses have faded into a distant and generally unwanted memory, we are approaching an excellent moment to re-examine the wisdom of requiring Americans to burn corn in our gas tanks.

During the presidential campaign, and especially its pre-primaries run-up, no national politician would have uttered a word against the decade-old ethanol mandate, even if it were linked to horrible birth defects in kittens and puppies. In presidential politics, Iowa literally comes first. And in Iowa, corn comes first – growing it and especially selling it.

Corn is Iowa’s top export, and most of it is not the corn humans eat off the cob or in our corn flakes. That crop is sweet corn, and its production is dwarfed by that of field corn – the stuff that goes into the bellies of livestock and, in a lot of cases, into our gas tanks. Farmers in Iowa produce a lot of field corn, and the ethanol mandate is understandably a huge issue for those farmers. Iowa voters are a huge issue for presidential candidates.

But when Donald Trump is sworn in as our next president, backed by a Congress controlled by Republicans who at least claim to oppose pointless and expensive regulation, it will still be about three years until the next Iowa caucuses. That is the very best time to raise the subject. Besides, Iowa Republicans backed Ted Cruz over Trump. This doesn't justify retribution on the part of the incoming president, but it does mean that Trump is not particularly beholden to Iowa Republicans. That’s a good thing.

The mandate has become both pointless and embarrassing. Right now it is steering billions of dollars in payments from mostly small, independent refiners to big integrated oil companies, because the giants generate more credits than they can use while the refiners are required to buy the credits if they lack the infrastructure to blend the ethanol themselves.

The credits are generated when ethanol is blended with conventional gasoline late in the supply chain, so the big companies have made infrastructure investments in order to not only comply with, but profit from, the rules. The Wall Street Journal recently reported findings by CVR Energy that suggests companies like Chevron and BP could collectively earn more than $1 billion annually by selling these credits. Smaller companies, and those without a major retail presence in the form of gas stations at every corner, are much more likely to have to buy a substantial amount of credits instead.

Back when oil was scarce and mostly imported from potentially hostile foreign producers, the ethanol blend requirement was intended to moderate American costs as well as lessen our dependence on foreign oil. But now we are a leading oil producer ourselves, and together with Canada, we have made North America pretty close to self-sufficient – and we have both reserves and technology to boost production even further. Prices have fallen by more than half from their recent peaks. Consumers, meanwhile, have shunned any fuels with more than the legally mandated 10 percent ethanol blend; many vehicles, as well as retail pumps, can be harmed by higher concentrations.

The only purpose still served by the mandate is to increase demand for corn – Iowa corn being high on that list. The price of corn shot from just above $2 a bushel shortly before the mandate was enacted to a peak of over $8 a few years ago. But then, predictably, farmers all over America developed an insatiable urge to plant more corn. The price thereupon collapsed back to the mid-$3 range, where it hovers today. Removing the ethanol mandate will likely drive prices down further, possibly close to the levels that prevailed a decade ago. That’s going to be bad news for farmers, and there is no sugarcoating it.

Then again, if we want to subsidize farmers – a point that is not self-evident, but is at least worthy of debate – there are other ways to do it besides trying to push an unwanted fuel into our gas tanks and directing a windfall to major oil companies in the process. Ideally, our free-market-oriented GOP Congress would simply stick to its principles and tell farmers to plant less corn and more of something else if the economics of farming dictate such a move.

Stop laughing. I know farmers grow corn all over America, that farmers live in rural areas, and that most Republicans get elected in rural areas – by farmers and their neighbors. Political principles always take a back seat to political reality. But we have the opportunity to bend reality just a little bit and get rid of the ethanol mandate, as long as we act at the right time.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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One Response to "Time To Jettison The Ethanol Mandate"

  • Duane Mann
    December 3, 2016 - 11:28 pm

    I agree whole heartedly! It is just not ethanol, it has been all the Farm Subsides since the Soil Bank Days. I was a Korean Veteran and was in college following war. The farm subsidy programs made it possible, in those days, for a strong farmer to take his farm subsidy and purchase his weaker neighbor’s farm with it. This is possible because land costs were low at the time. You could literally take your government check and buy 80 to 120 acres with it. I am now 85 years old and I watched it all. A farmer the other day told me that there used to be 7 families living on the land that he owns, and he is considered a small farmer today. Our small community leaders squirm and scratch to keep their towns alive by looking for government main street block grants and etc., and don’t realize that the Federal Government Farm Programs are responsible for gutting our small towns and businesses. Most farmers today have net worths of millions and yet they are pulling in millions in government subsidies. The generation serving in leadership roles today don’t understand this at all. Makes me age all the more to watch it all go down.