All Ears Turn to Ethanol by Mike Fladlien

"Only twice in my life have I ever seen a

record corn crop and prices rise," says Don Smith,
an octogenarian farmer in Lake View, Iowa. With
federal mandates requiring 9 billion gallons of
ethanol production and ethanol subsidies of 51
per gallon, farmers in Iowa are finding that corn
looks a lot like gold.

Farm subsidies originally were put in

place to protect farmers from the severe price
fluctuations from weather and technological
advances. The uncertainty of weather like the
flooding Iowa and Illinois experienced in the
summer of 2008 could wipe out a family farm. Bad weather combined with bio-technical advances
in hybrid engineering like Monsanto’s Round-Up Ready seed corn make agricultural prices
volatile.

In 1950, there were 18 million jobs in agriculture. In 2002 there are only 3 million. The
family farm is an American institution where children who work on the farm gain family values,
learn hard work, and learn life lessons about savings. Since 1950, farm output has doubled as
farmers have substituted machines for labor. Biotech advances in genetically engineering food
have increased the supply of corn.1 Weather and technological advances put downward pressure
on commodity prices. When the weather is bad, floods wipe out the cash crop. When the weather
is good, excess supply depresses prices. To protect farming as an institution, farm subsidies were
put in place in 1933 to provide a steady income for those who chose to work the land.

In the 1980’s the subsidies produced excess supply of corn. The government had to store
the corn or sell it on the world market. Selling the corn on the open market depressed the world
price and farmers from Africa and Europe complained that America was unfairly competing.
Storage was costly so the government began to subsidize the production of ethanol. Ethanol
production was costly and inefficient but eventually would provide a viable alternative to
dependence on foreign oil. To protect the new ethanol industry, the subsidies remain in place
today.

Sharon Savage, Democratic challenger for the Iowa Senate, sees ethanol as an
intermediate step in the quest for renewable energy. “I see ethanol as one facet of a total energy
program,” Savage says. “I see it as an important and necessary intermediate step. I think it is
great that Iowa is focusing on alternative energy development. We need to release ourselves
from the claws of petroleum. It seems that the soil continues to support our population,” Savage
says.

As the infant industry grows, new innovations will change the way energy is produced
and become more efficient. Thus, subsidies are necessary for the biofuels industry to support the
infrastructure growth necessary for this growth to occur. As an example of how technology can
change the way ethanol is transported might be the development of a pipeline that allows ethanol
to be produced in Iowa and piped to the coastal states instead of bulky and inefficient trucking.
The subsidies are necessary to develop a cheaper source of biofuels in the future. When this
infrastructure is in place, then the subsidies will be removed.

Iowa is a net exporter of energy. Nearly 48,000 jobs were created in Iowa and $1.7 billion
in disposable income in the ethanol industry. Iowa Corn Growers Association claims that
dependence of foreign oil is reduced by 128,000 barrels a day.2

1
 When the price of a barrel of oil increases, more dollars flow overseas—away from U. S.
markets. Many feel that the increase in oil represents a transfer of wealth away from U. S. to
foreign producers. Savage states, “The main issue with ethanol is that we are producing it
domestically and the money is being spent domestically rather than transferred to other
countries. When U. S. citizens buy foreign goods, foreign countries must either spend the dollars
they receive on U. S. goods or the foreign countries must buy our debt instruments. When
foreigners buy our T-bills, they are buying U. S. assets. Less reliance on foreign energy will
retard some of the wholesale selling of U. S. backed securities.

Some of the direct foreign investment has found its way to Iowa. According to Iowa
Renewable Fuels Association, ethanol has attracted over 3 billion in investment in Iowa.3 A trade
deficit actually leads to a capital inflow into the U. S. —part of which makes its way into the Iowa
economy. In August, the national unemployment rate was 6.1 compared to 4.6, seasonably
adjusted in Iowa. Exports increased 3.3% from June to 168.1 billion.

Ethanol has critics. Subsidies lower the cost of production and increase the supply of
corn. When farmers plant more corn, they must plant less wheat and soybeans since tillable land
are scarce. As a result, the price of wheat rises and so do the prices you pay for bread, pizza,
and any other good in which wheat is an ingredient.

For Iowans and corn growers all ears are turning to ethanol.

Sources:

1. Mankiw, N. Gregory, Principles of Economics, third ed., Thomson Publishing

Company, page 105, 2004
2. http://www.iowacorn.org/cms/en/Ethanol/Ethanol.aspx
3. www.IowaRFA.org