The Looming Ethanol Bailout

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Next up on the bailout front: ethanol? Things are looking that way after Secretary of Agriculture Ed Schafer worried to reporters in Des Moines, Iowa, that some ethanol plants are in financial trouble after intense speculation on corn prices early this summer.

Schafer pointed out that ethanol producers that are in financial trouble are eligible for government loans to keep them afloat. Under the USDA's Rural Development Program, up to $25 million is available to bail out troubled ethanol producers. Schafer says bailout options should be available to keep money flowing to farm economies in rural areas.

The trouble began this summer when some ethanol companies speculated on corn prices at $7/bushel. Now that corn has fallen to less than $4/bushel, the ethanol companies that took positions are taking massive losses. But they'll survive if they can use the government loans to purchase lower cost corn to mix with the more expensive summer '08 vintage. An ethanol bailout will seal the deal.

What explains a bailout of an industry that almost no one likes?

Fiscal conservatives are opposed to ethanol because it is heavily subsidized by taxpayers. In 2005, the federal government mandated that at least 7.5 billion gallons of ethanol be added to the U.S. fuel supply by 2012 and last year increased that to 36 billion gallons by 2022. Even with a super-sized government mandate for production and blending of ethanol, ethanol companies are failing.

Many environmentalists now oppose the production of ethanol because it is at least as environmentally harmful as oil. Groups like the Environmental Working Group and Greenpeace strongly oppose the further production of ethanol because, they claim, it exacerbates climate change.

Left and right leaning activists who work on issues of global development and hunger are opposed to the production of ethanol. Why? Because it has driven up global food prices, so that they have dramatically outstripped gains in incomes levels over the past few years.

Who, then, is supporting ethanol?

First, corn producers love ethanol production. When corn prices hit $7/bushel, farmers were making more money than they ever thought possible.

Of course, the domestic ethanol industry wants to keep making it. Sugar-based ethanol imported from Brazil is cheaper and cleaner but ethanol producers want it to remain subject to high tariffs. That's what keeps sugar-based foreign ethanol more costly and less competitive than ethanol made from Midwest corn.

Politicians have a vested interest in ethanol if they come from districts that have corn growers and ethanol plants. However expensive it is to taxpayers, ethanol generates money and jobs for a politician's constituency, and that means votes.

Let's review. Leftwingers, rightwingers, and everyone overseas oppose domestic ethanol. Corn farmers, ethanol producers, and a handful of politicians support ethanol and its protection from foreign imports. Guess who has more power?

Yet a bigger bailout for ethanol producers will likely pass with minimal opposition. We’ve now created a moral-hazard-free, bailout culture. When the "Big One" passed a few weeks ago, the deluge commenced.

Now, it's almost hard to think of an industry that isn't clamoring for a bailout. What's $25 million for ethanol, plus billions in subsidies and mandates, compared to $25 billion for automakers and $85 billion for AIG, and whatever else may slip through the cracks in the coming late night lame-duck session?

If the United States can't make a market work, how will anyone? This is the question that people will ask themselves. But, it is the wrong question.

Governments cannot make markets work. The federal government has tried to make ethanol work for years now. It never worked on its own; and it is not working with considerable government giveaways. What makes the Agriculture policy czars think it will work if it is granted another bailout?

Eric Heidenreich is director of Capital Research Center's State Environmental Watch.
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