Ethanol is a Budget Buster

Increased Mandate and Subsidies Would Raise Food Prices and
Strain Federal Budget
By William Yeatman*

News story after news story highlights the impact of ethanol mandates on food prices in grocery stores across America. The story line is familiar. Ethanol is made from corn, and the new federal ethanol mandate is raising demand for corn and thereby exerting an upwards pressure on the price of corn.

Costlier corn, in turn, affects the price of a wide variety of groceries. For some products, like soda, corn syrup is a direct input, and higher corn prices are raising production costs. Corn is also a major feedstock for cattle, hogs, and chickens, so higher corn prices are raising production costs for a wide array of products, such as milk, eggs, cheese, beef, pork, and poultry.

Higher corn prices are also encouraging many farmers to plant more acres of corn, which means fewer acres of soybeans, other grains, and even cotton. Lower supplies of these commodities are already reverberating throughout the economy, with reports, for example, of higher beer prices. These impacts will intensify if Congress raises the current ethanol mandate of 7.5 billion gallons to 36 billion gallons.

The link between ethanol mandates and higher food prices has been demonstrated amply in the media. What has received scant media attention is the fact that the increased ethanol mandate proposed by President Bush, passed by the Senate, and now before the House, is a budget buster; it would cost American taxpayers almost a quarter trillion dollars or more over the next 15 years.

Given that entitlement spending is set to skyrocket as baby boomers retire, the enormous costs of ethanol mandates threaten to become an unmanageable budget liability.

Table 1 shows the estimated aggregate federal budgetary costs of a 36 billion-gallon ethanol mandate. Much of the liability—nearly $150 billion—comes from a 51 cents-per gallon refundable tax credit. Other major budget costs include:

• $10.8 billion in future loan losses for loan guarantees for cellulosic ethanol plants;
• An estimated $17.7 billion for a strategic ethanol reserve to deal with the
production shortfalls in corn and biomass caused by droughts;
• And $23.9 billion in corn and cellulosic production subsidies.

This corn subsidy is startling. Corn farmers are receiving taxpayer subsidies simply for growing corn when ethanol mandates already assure them substantial profit margins by pushing up the price of corn!...

Four page PDF from the Competitive Enterprise Institute