Doubts grow over ethanol

Sharply rising food prices may force Congress to reconsider the fivefold increase in ethanol production it mandated just four months ago, some lawmakers say.

Few members appear willing to call for the outright repeal of the Renewable Fuels Standard (RFS), which requires that 36 billion gallons of ethanol be produced by 2022. Of that, 15 billon gallons would come from corn.

{mosads}But the new concerns represent a significant turn for a policy issue that was embraced by both congressional Democrats and President Bush as a way to boost rural economies and domestic energy security.

“We certainly did not anticipate what’s happened, if that was the cause,” said Sen. Pete Domenici (R-N.M.), ranking member of the Energy and Natural Resources Committee.

“We don’t know how much of the food crisis was caused by it, but nobody expected it to cause much.”

Committee Chairman Jeff Bingaman (D-N.M.) added: “I think it’s something we need to look at.”

When asked if he would be willing to change the mandate if it is found to have driven up food prices, Bingaman said: “Depending on what was concluded, I’m open to anything. But at this point, I don’t think we have good information as to the extent to which that is a factor.”

Senate Majority Whip Dick Durbin (D-Ill.), an ethanol supporter, also opened the possibility of revising the current ethanol policies.

“I supported ethanol from the beginning, and still believe in it. I believe biofuels have a great future,” Durbin said, “but we have to look at it honestly. What is the current impact and what do we have to do, if anything, to address any changes?”

Stoking the second thoughts is a loose collection of oil companies, livestock producers and grocers that tried unsuccessfully last year to block the RFS.

Oil companies don’t like the mandate because they say there is insufficient infrastructure to handle the big increase in ethanol. Livestock producers oppose the mandate because it has raised the price of the corn that they buy to feed cattle and hogs.

Grocers blame the mandate for rising food costs.  

Scott Faber, vice president for federal affairs at the Grocery Manufacturers Association (GMA), compared lawmakers to late-night revelers who are just beginning to understand the consequences of their actions.

“A lot of lawmakers are wondering who the hell they woke up with,” Faber said.

Ethanol producers and farm groups representing corn growers strongly reject the suggestion that the RFS is a significant factor in the increase in global commodity prices.

{mospagebreak}Tom Buis, president of the National Farmers Union, pointed instead to a number of other causes: rising oil prices, which in turn raise the costs of producing food; a weak dollar; low interest rates, which drive investors to commodities like corn, wheat or gold; a global drought that hit wheat crops; and growing demand for food in developing countries like China.

Buis says the factors amount to a “perfect storm” that has stressed global food markets.

“The simplistic view is to blame ethanol,” Buis said.

{mosads}Corn-based ethanol, for example, was tagged as the cause of a tortilla shortage in Mexico even though tortillas are made from white corn, not the yellow variety used to make ethanol, Buis said. Similarly, although brewers blamed ethanol for rising beer prices, rice and barley are the main ingredients of beer, not corn, he noted.

Buis will make those points at a Joint Economic Committee hearing on the rising costs of food scheduled for Thursday.

The House Energy and Commerce Energy and Air Quality subcommittee plans to hold a hearing next week on the RFS.

Ethanol critics acknowledge that a variety of factors have contributed to the food crisis. They counter that Congress can’t change any of them except the ethanol production mandate.

As much as 25 percent of this year’s corn crop is expected to go to make ethanol. The RFS calls for 9 billion gallons to be produced by 2009.

Ethanol supporters say that won’t affect grain supplies because farmers plan to increase corn production to near-record levels.

Sen. Byron Dorgan (D-N.D.) said that although ethanol has taken up some of the supply of corn, “additional acres of corn have been planted.”

“I don’t think at this point we should change the Renewable Fuels Standard,” Dorgan said.

Critics say increased production displaces crops like wheat that are in short supply globally.

Oil companies that have to blend ethanol with gasoline are also lobbying against the mandate. Charlie Drevna, president and CEO of the National Petrochemical and Refiners Association (NPRA), called the RFS “inefficient and uneconomic.”

What is happening to food prices is “what we see when emotion and politics outstrip sound public policy and good economics,” Drevna said.

His group lobbied for benchmarks that the federal government would have to certify had been met before requiring fuel blenders to meet the ethanol targets.

Now NPRA is seeking an outright repeal.

Faber said grocers have more modest goals. “I’d be surprised if lawmakers turned on a dime and reversed themselves,” he said.

Instead, GMA plans to push to delay the initial production targets of the RFS so that the impact on global food prices can be studied further.

GMA, which plans to hire agricultural economists to help them make the case on Capitol Hill, also wants Congress to reconsider tax breaks and tariffs that support domestic corn-based ethanol producers.

House Majority Leader Steny Hoyer (D-Md.) indicated in a press conference Wednesday that he supported revisiting ethanol policies in the farm bill.

“I think you may find that there’s a change in policy [in the conference report],” Hoyer said. “I think the conferees have recognized that problem and have addressed the issue that the food crisis has made clear. I think you will find there’s been a modification of existing policy.”

Asked if he meant he supported decreasing subsidies for ethanol, he said, “Yes.”

The farm bill would reportedly decrease the tax credit for blenders from 51 cents a gallon to 45 cents a gallon. It would also raise the break for cellulosic ethanol to $1 a gallon. Made from inedible crops, cellulosic ethanol does not raise the same food-versus-fuel concerns than corn-based ethanol does. But it cannot yet be produced economically.

Ethanol’s opponents are taking the lobbying battle to the states. Already, Texas Gov. Rick Perry (R) has sought a waiver from his state’s responsibilities under the ethanol mandate because of the economic harm of complying. Drevna said a number of other states will probably follow suit.