"The US Government is subsidizing corn ethanol, and the unintended consequences are starving little kids in China and the Pygmies in Africa, because our misguided boondoggle in the form of corn ethanol mandates has created a world-wide food crisis.  It's even making our pizza more expensive!"

Naturally, a bunch of Congressmen are running and leaping as fast and as far as they can to catch up to the head of this parade of corn ethanol bashing.  The New York Times is (as they are pretty much all the time) in full-throated roar, demanding an instant end to the corn ethanol mandates and subsidies (most recently upped again in the 2007 energy bill that Congress passed and President Bush signed).  The Gray Lady has been joined in this caterwaul by the UN, which condemns America's cold-hearted theft of food from the mouths of starving babes, and even OPEC leaders like Hugo Chavez, and environmentalist activists are joining in too.  Corn prices are up - as expected - but so are prices for just about all food grains in commodities futures markets, including rice, wheat, barley, and millet.  In fact, the prices of most commodities have been skyrocketing in the last year - including industrial metals like copper, and precious metals like gold and silver, and then there's oil too, of course.

"See, there's the proof - grain prices are skyrocketing, and the only possible explanation* is that the evil American government, led by that stupid Cowboy President, have screwed things up yet again, big time."

* Gee, I could've sworn that virtually all of the commodities have been escalating in price lately.  Like, uhmmm, oil, for instance!  Or how about gold, silver, copper, etc. etc?  Frankly, anybody who's been reading the Wall Street Journal or Barrons in the last six months can recite the simple fact that, with the American housing bubble burst in 2007, followed shortly thereafter by the sub-prime mortgage crash that reverberated throughout all international financial markets, it is no secret that investor cash has been seeking safe havens elsewhere ... like, in, uhmmm, commodities!  Guess what, the financials market tanked and commodities went skyward.  Lehman reports that commodities index funds grew from $70 billion US in early 2006 to $235 billion in April 2008, and warns of a commodities bubble that may soon burst.  Who'd a thunk it?

The rising demand for commodities includes food grains like corn, wheat, rice, and so forth.  Not to mention the effect of most commodities being priced in the plummeting US dollar.  It's basic Market 101 stuff **, folks ... don't blame behavior of the entire world financial system on what American corn farmers do with less than one third of their crop, even as they maintain total corn exports at about the same levels as before the "crisis".

** Speaking of basic Market 101 stuff, the old saying "what goes up, must come down" applies equally well to commodities as it does to, say, real estate.  A bubble is a bubble, and just like the housing bubble burst last year, the "commodities bubble" could just as easily collapse next year, or even later this year.  Indeed, the more that housing and financials markets strengthen, the likelier that commodities investors will start moving back out of gold, silver, copper, corn, wheat, and rice.  And will the geniuses now calling for the immediate death of the corn ethanol industry be lining up to buy back all that excess corn, wheat and rice when that bubble bursts?  Not likely.

Getting back to the outcry on ethanol mandates, however, it's been a case of "facts!  we don' need no damn facts!" amongst the chattering class.

"Now, damn you, stop all this corn ethanol foolishness, immediately!"

The politicians are already saying it.

Well, I've lived long enough to learn that the Conventional Wisdom is almost always wrong.  That rule is particularly applicable when the CW cheering section is led by the New York Times, Hugo Chavez, the UN, and environmental activists.

It's surprising, however, and particularly disturbing to me that fairly large numbers of conservative commentators, bloggers, etc. are also jumping on the NYT/UN/Chavez/GreenPeace bandwagon to condemn corn ethanol production as an evil enterprise.  The bandwagon travelers are not your typical conservative bedmates.  But the thing is, many of these misguided conservatives are so into bashing anything that is led or driven by governmental action - as are the corn ethanol mandates - that they are now acting in knee-jerk fashion without considering the underlying fundamentals of what is happening right now ... in both the energy markets and the food markets, and indeed in commodities markets in general.

The anti-ethanol myth-making has been going on for a very long time on the right side of the political spectrum, of course, because governmental support for ethanol production has been - in the estimation of many observers - fatally joined at the hip with America's flawed farm subsidy programs which continue to get more and more bloated and disconnected with good public policy - all done in the search for Midwestern farm state votes in the quadrennial Presidential primaries.  Certainly there is good reason to question almost any aspect of current American farm products price support programs, but unfortunately, the myths of corn ethanol production are legion and almost entirely false and/or misleading.

Here's some examples of the corn ethanol myths:

1. It takes more energy to make corn ethanol than it delivers, so it actually makes America more dependent upon imported oil
2. Corn ethanol is subsidized by the Federal Government
3. Corn ethanol is sucking up too much of the US corn crop, which reduces worldwide food production, leading to the current worldwide food crisis that is unconscionably starving little children in Africa and Asia .... therefore corn ethanol production is immoral!
4. There is so much demand for corn for ethanol that farmers are willy-nilly converting wheat and rice fields to corn crops, thus further reducing world food supplies of other grains
5. Corn ethanol pollutes the air more than petroleum fuels do
6. Corn ethanol is bad for your car and reduces your fuel mileage
7. Why bother with corn ethanol, when non-corn ethanol is a better substitute for oil

This topic could easily become the subject of a book-length dissertation.  That's not what this blog is supposed to be ... but nevertheless, let me address each one of the myths above, providing a few key links so that you can go forth and read some of what I describe for yourself.  Then you can decide whether you believe the headlines and the politicians and the talking heads and bloggers, or not.

Myth No. 1: "It takes more energy to make corn ethanol than it delivers, so it actually makes America more dependent upon imported oil."

This myth is simply not true, but at one time, decades ago, it may have been true for a short period of time.  Back in the 70s, during early R&D on corn ethanol production, which came in response to the first OPEC oil embargo, the inefficiencies entailed in growing corn, transporting it for processing, and producing the fuel itself rendered the "net energy gain" (NEG) of corn ethanol to less than one ... meaning, it required more fuel (in terms energy content, as measured in British Thermal Units, or BTU, to produce corn ethanol than it yielded as a liquid fuel.

But lo and behold, it's now thirty some years later, and like virtually everything else in our technology and productivity-driven world, the efficiencies in both corn production and fuel processing have increased greatly.  Farmers finally acquired and aggressively used computer information technology in the 90s, and researchers developed genetically engineered corn varieties for the first time in history.  By the mid-1990s, NEGs for corn ethanol were being reported in the net positive range, about 1.24 to 1.  By 2004, with increasing crop yields, better energy efficiency in fuel production, an increasing number of corn ethanol plants (reducing the distance corn needed to be hauled for processing), the USDA and Argonne National Laboratory in 2002 reviewed all the recent studies on corn ethanol and reported an NEG 1.34 to 1, based upon all energy inputs, and an even higher 6.34 to 1 based upon imported liquid petroleum fuel inputs.  The increase in NEG for corn ethanol has continued to increase since 2002, with ethanol producers reporting in 2004 that in just the previous five years (1999-2004), ethanol plants on average had increased their ethanol yield per bushel of corn by 15%, and reduced their energy consumption per bushel by 20%.  Such improvements continue today, four years later.  Farmers today also use more efficient farming practices (fertilization, insect controls, irrigation, etc.) and better corn hybrids that require less of all of the above, thus reducing the total energy required to produce a bushel of corn.

Myth No. 2: "Corn ethanol is subsidized by the Federal Government"

This myth is partially true (at the "top line"), and yet at the "bottom line", it isn't.  Well, yes, corn farmers - make that ALL corn farmers, not just the ones who grow corn for ethanol - enjoy the financial benefits of Federal agricultural price support programs, just as do most other US farmers who produce favored ag commodities like wheat, rice, sugar, peanuts, and dairy products.  But ethanol-destined corn is not subsidized differently from feed corn or Cap'n Crunch corn.  Corn ethanol producers do, however, receive a 51-cent per gallon production subsidy. 

However, the inter-workings of these two subsidies are not as simple as they may appear.  If the corn ethanol production subsidy boosts the demand for corn (as it does), then corn prices naturally tend to rise (as they are doing now).  When corn prices rise, then the money paid to corn growers in the form of governmet price supports (to keep prices above a target price) then goes down.  The net effect of these two subsidies - i.e., those subsidies paid to corn growers plus those paid to corn ethanol processors can be - as it was in 2007/2008 - a net reduction in crop subsidies paid.

Gee - an intelligent government program!  What a concept!

Total corn ethanol subsidies paid in 2007/08 totaled about $3 billion, but total corn crop subsidies paid out decreased by $6 billion from the year before, meaning the corn ethanol production subsidy paid for itself by a factor of two times.

Plus, on top of a net reduction in corn subsidy payments, the rising price of corn coupled with the 6% increase in corn exports created a net $20 billion improvement in the US trade deficit in 2007.

Even better, with a virtually long term guaranteed rise in corn demand,  the reduction in corn price support subsidies is likely to continue indefinitely, more or less permanently reducing taxpayer-paid corn subsidies in the US.

What's not to like about that?

In truth, most corn-ethanol naysayers continue to untruthfully blast corn ethanol as a government subsidized boondoggle.

The other form of government support to corn ethanol production is the ethanol mandates in the 2005 and 2007 energy legislation as enacted.  But a mandate to produce ethanol is not a subsidy - it is only a virtually unenforceable statement of government intentions and policy.  The mandates do not have any mechanism for forcing individual corn farmers to sell their crops to ethanol producers.  The mandates do not force individual investors to pony up capital to build corn ethanol plants.  What the mandates do is to create a market, which is, above all else, a psychological mindset, that yes, indeed, there will be a market for your product if you grow more corn, or if you invest in a corn ethanol plant.

In fact, the previous corn ethanol mandate in the 2005 energy bill worked so well that the mandated 2012 production of 7.5 billion gallons will be achieved this year - in 2008.  It's clear that the marketplace responded much better than the architects of the 2005 legislation envisioned.  Of course, the fact that OPEC continues to oblige the corn ethanol industry with artificially-low production rates in the face of record oil prices only hastens the response of the free market.

Myth No. 3: "Corn ethanol is sucking up too much of the US corn crop, which reduces worldwide food production, leading to the current worldwide food crisis that is unconscionably starving little children in Africa and Asia .... therefore corn ethanol production is immoral!"

Well, well, where do I begin, there's so much bunk to debunk here ... including the critics' misunderstanding of food production and food use, as well as silly moralizing.

First of all, US corn exports - as I point out above - increased last year.  How does that little fact comport with the argument that corn ethanol is depriving little kids of their corn?

Second of all, even if the US corn exports didn't increase - which they did - most of the world's poor who are in danger of starvation have subsistence diets based upon non-corn grains, principally rice and wheat, which have been the staple foods of European, African, and Asian peoples for many thousands of years.  Corn was only discovered in the New World by European conquistadors (well, actually, the native Americans discovered and cultivated corn, and the Euros discovered the Americans) a mere 500 years ago, which then was introduced throughout the "old world", where corn or "maize" met varying levels of acceptance.  Today wheat and rice are the dominant food grains for most of the world's poor.  The principal reason that US corn is used to feed starving people is a US law that requires that all foreign food aid be purchased from US growers, rather than from local or regional sources.  So whenever there is a local or regional food shortage, the net effect is that US aid wipes out the market for local or regional grain growers, whose farmers cannot compete with "free" US corn.  This is a misguided policy on its own merit.

Secondly, most US corn is grown not for direct consumption by humans, but is raised and consumed as dried "field corn".  That field corn is used mostly as livestock feed for domestic cattle, hogs, chickens, and such - and in any case, the world's starving poor never could afford to buy imported American beef, pork, or chicken.  Similarly, aside from corn ethanol production, the next largest use of American corn is for corn syrup production - so that we can sweeten our soda pop, confectionaries, breakfast cereals, etc.

So if someone insists on making a moral argument against corn ethanol production, they're aiming at the wrong target.  Is it less moral to grow corn for US vehicle fuels, depriving OPEC-funded terrorist thugs (Al Qaeda, Hamas, Hezbollah, the Taliban, and Al Quds) of American dollars that they use to fund the wanton slaughter of tens of thousands of innocent civilians, women, children, and the elderly ... than it is to use the same corn to grow sweeteners for your kid's (or your?) Cap'N Crunch in the morning?

You see how silly it gets!  You cannot impose moral objectives on a free market, without making it an unfree market very quickly, and without at the same time getting tied up in so many moral knots as to make the entire enterprise self-defeating.  Leave the moralizing to the pulpit and the UN General Assembly.  Leave the free markets to the free markets!

Myth No. 4: "There is so much demand for corn for ethanol that farmers are willy-nilly converting wheat and rice fields to corn crops, thus further reducing world food supplies of other grains."

Contrary to what this argument says, there is no lack of productive farm ground in America.  In fact, as many of us realize, the US government pays American farmers to not grow food crops, in order to keep food commodity prices high under our ag price support laws.  Also, this argument ignores the fact that while US corn production is increasing to meet the new demand for corn ethanol, according to the USDA, US production of wheat, rice, barley, and other crops is also rising, with US wheat production increasing in 2007 by 14%, and US rice production increasing by about 2%.  The USDA also projects that, even with increasing corn ethanol production, US corn exports are projected to remain flat and then gradually increase over the next 7 years. 

And why is production of these other crops increasing?  Because worldwide demand and prices are high.  Which means that US agricultural production is an example of an elastic supply and demand marketplace - when demand goes up, prices go up, and production soon follows upward as well.  There is no lack of US farm production capability that is constraining our ability to meet market demands.

Myth No. 5: "Corn ethanol pollutes the air more than petroleum fuels do."

I know some headline-grabbing researchers are out there peddling this myth, but even the Natural Resources Defense council is disputing one such study.  But the fact is, when ethanol used as an additive in gasoline at the typical E-10 rate (10% by volume), the net effect is a reduction in numerous categories of regulated air pollutants, including particulates, carbon monoxide, toxic hydrocarbons such as benzene, and ozone (through reductions in ozone precursors in gasoline - i.e., volatile organic compounds and carbon monoxide).

Myth No. 6: "Corn ethanol is bad for your car and reduces your fuel mileage."

Now it's true that ethanol has a lower energy content, as measured in BTU, as compared to gasoline (about 76,000 BTU/gal for ethanol vs. a seasonally-variable 108,000 to 117,000 BTU/gal for gasoline).  So naturally running on pure ethanol will reduce the miles per gallon yield from what gasoline typically produces in your car.  But most cars will not run safely on pure ethanol, or even on the commercially-available E-85 blend (85% ethanol/15% gasoline).  Only certified "flex fuel" vehicles - of which only a very few exist, and only a very few (but growing number) are being produced today - can safely burn E-85.  However, virtually all gasoline-engine vehicles run safely and efficiently on E-10 (10% ethanol/90% gasoline), and this fuel is now readily available, and will become more available as the ethanol supply increases.  The EPA has found that the typical E-10 "reformulated gas" fuel, or "RFG" (10% ethanol and/or other oxygenates such as MTBE or ETBE/90% gasoline) yields a total reduction in fuel mileage of only 1% to 3% in typical vehicles.  In fact, the EPA says the difference in fuel BTU content between typical winter blend and summer blend gasoline is larger than the difference in BTU content between E-10 and pure gasoline.  And the EPA says this reduction is virtually unnoticeable to most drivers, for whom other factors (i.e., the way they drive their cars, tire pressure, vehicle maintenance, etc.) tend to have much larger effects on the vehicle fuel mileage that actual drivers obtain.  In any case, EPA requires oxygenates for gasoline anyway - whether it is MTBE (now outlawed due to concerns over water pollution), ETBE, or ethanol.  So the bottom line is if you use E-10 you will not notice any significant change in your fuel mileage from "pure gasoline" (which isn't pure gasoline in any case).

Myth No. 7: "Why bother with corn ethanol, when non-corn ethanol is a better substitute for oil?"

This isn't really a myth as much as it is an excuse for doing nothing about American energy independence.  Sure, it is fairly well known now that cellulosic based ethanol has a much higher NEG than does corn ethanol (about 5 to 1 vs. 1.34 to 1), and for that reason, the 2007 energy bill mandated, for the first time, a non-corn ethanol production mandate that, by 2022, will exceed the corn ethanol mandate in that same year (21 billion gal. vs. 15 billion gal.).  But the problem is, the cellulosic ethanol production cycle has not yet been commercialized at full scale, whereas corn ethanol has been commercially produced for decades, and has become very dominant and well understood in the last ten years in particular.  So the cellulosic ethanol industry, while I have every confidence it will prove feasible, effective, and efficient, is still a few years off.  In the meantime, we still need to replace foreign oil with home-grown fuel, and for that, corn ethanol is the "bird in hand" that always beats the "bird in the bush".  By all means, lets develop a cellulosic ethanol industry in America.  Let's do biodiesel too, along with wind energy, photovoltaic, and the holy grail of alternative energy production: nuclear fusion.  But we have corn ethanol, so let's use it, while we work on fixing the bugs (in some cases, literally!) in those other sources so that altogether, we can completely wean ourselves from those OPEC guys who are taking large amounts of our money and sometimes using it for very nefarious purposes.

Whew!

This may not have been a dissertation, but it's been plenty long enough.

Yet there's a great deal more to examine, discuss, and consider in the world of energy ... some of this other stuff is frankly much more exciting to ponder than corn ethanol.