Prices for gasoline, food and most other staples of life continue to rise and rise and rise. The latest idea from Washington to ease high gas prices calls for energy initiatives grown on U.S. land: an increase in the amount of ethanol allowed in our gas tanks. But will this combat inflationary gas prices? Or just increase food prices for consumers?
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The effects of inflation and turbulent energy prices have shocked many of us – and our wallets – to the point of exhaustion. The U.S. government wants to ease this cycle, but when crop supplies are tight and inflation is running high, we must find the delicate balance with America’s agricultural abundance for food and fuel.
Where does ethanol come from?
Ethanol is a byproduct that comes mostly from fermentable carbohydrates in corn, but can also be derived from sorghum, wheat, and other starchy crops. What makes corn so attractive is that most of the kernel goes to use in the production of ethanol.
Corn is a cornerstone commodity of the modern food system. Along with high-value meals from soybeans, it is a critical and abundant protein source for maintaining flocks and herds around the world. As the world’s leading producer of corn, the United States is at the virtual center of the animal-protein system.
Last year’s U.S. crop totaled 15.1 billion bushels.
That’s enough to give every person on Earth two bushels of corn.
What is behind high food prices?
The causes of current food price inflation are many and varied, with higher energy costs as the most prominent factor.
Consider this: the world uses about 100 million barrels of oil a day. During Covid, demand dropped to around 92 million. That excess capacity maxed out global oil storage, and with nowhere to store the oil, prices dropped to below $0 at one point, essentially paying companies to buy their oil. As a result, drilling and capital investment in new wells stopped.
Then, the world came back to life. And with that, energy demand picked back up to previous levels.
So now we have high demand again due to economic growth. And when we put a war on top of that, it creates the perfect conditions for a high inflationary environment. But it all started before the Russia-Ukraine conflict. And even Covid, for that matter.
Inflation’s global grasp
Our current environment is the result of compounding events. For instance, do you remember when China lost most of its pigs to African Swine Fever back in 2018? Their hog population has recovered which only increased their demand for animal feed – coming from corn and soybeans. Yet supplies for animal feed were tight. Droughts in North and South America – where China imports its crops – decreased supply and of course increased crop prices.
And then a serious global disruption hit and with it, unpredictable consumer behavior and perpetually mutating supply chains. Now, add in a global recovery, leading to increased oil and natural gas demand – and prices. High energy prices make everything more expensive – including farming the global crop supply as fertilizer prices and transportation costs increase.
Next up: volatility and uncertainty with Russia’s invasion of Ukraine. The invasion alone has devastated local economies and rocked supply chains, but with China, Russia, Canada, and Belarus as major exporters of fertilizer needed for crops around the world, our global food system is pushed further into price uncertainty.
Because of these factors, farmers now have even more pressure than ever before to plant more crops using less fertilizer while consuming less energy. Many farmers are already maximizing their yield with technology improvements such as precision farming and regenerative agriculture. In fact, corn yields last year were 177 bushels an acre, a robust 4 percent increase from 2020.
What’s behind the move to expand ethanol use?
President Biden wants to reduce gas prices by adding more ethanol into the gas pumps to make sure gas prices don’t float over $5 a gallon for the summer.
Raising the current standard of allowing a 10-percent blend of ethanol (“E10”) into the gas used in our cars to 15 percent (“E15”) seems like a good idea, with prices at the pump now averaging just over $4 per gallon.
At such levels, the ethanol component of a gas mix seems to be less costly than the gasoline it displaces. And with a simmering voter revolt against the highest inflation rate in 40 years or more, the idea obviously has its political allure. Wrapping the decision in the guise of evolving energy policy and economic aid to consumers makes it an easy, flag-waving exercise. Especially before the mid-term elections.
This move may also help farmers. Purdue University studied renewable fuels and found that biofuel income has also shown to increase annual farm income by $10.6 billion between 2004 and 2016 since the Renewable Fuel Act was introduced.
But would this really work?
The story is much more complex than an academic study – and full of additional realities that also need to be considered. Expanding ethanol use for energy may not ease farmer production pressure. In fact, it may have adverse effects as it could maintain the upward price pressures that currently are sweeping through commodity markets – especially for corn and other cornerstone commodities.
Administration officials and media reports say an increase to a 15-percent ethanol mix will reduce prices at the pump by about 10 cents per gallon. At a national average per-gallon gas cost of $4.03, that equates to a 2.4 percent drop, at best.
What’s more, that small savings may have limited availability. Our nation has roughly 150,000 gas stations, serving an estimated 270 million cars. But only 3 percent of all stations offer the E15 blend. Additionally, these E15 stations are largely concentrated in the Midwest and South.
Though we can hope for a quick nationwide expansion of E15 stations, it will take time, as these stations require compliance with additional regulations, unless the Administration releases a temporary waiver. And then we have taxpayer dollars to consider for these improvements.
Whatever minimal gains that come at the gas pump could be offset by the losses at the supermarket generated by food price inflation and additional taxes.
Perhaps cognizant of the practical problems created by having so few facilities available to deliver in the expanded ethanol formulation, Administration officials and many economists said President Biden’s decision will have no significant effect on corn prices. They also probably said that because E15 has already been sold through the fall, winter, and spring from 2019 to 2021, making E15’s availability in the summer months the only meaningful addition.
Ethanol’s ‘byproduct’ effects
Even so, the announcement will have an important psychological effect in the marketplace. Any steps to expand demand must have some effect on price if basic laws of supply and demand still apply. Even if the ethanol action had a completely neutral influence on the market, it does nothing to reduce the upward pressures driving food price inflation, especially in the animal protein industries.
An increase in the price of corn increases the price of the steak or chicken at your table.
President Biden’s announcement only helped maintain the currently strong corn price, which now stands at around $8 per bushel.
Most market analysis also cites the importance of China as a growing market for U.S. corn and other commodities – and with ethanol, a major factor in the historically high commodity prices seen this year by farmers and consumers alike. Corn prices have risen by more than one-third since the beginning of this year, adding more than $2 per bushel in less than four months.
The simple truth is that demand for corn for domestic use, for exports and for current ethanol production remains robust, with real and immediate bullish effects on the price of a cornerstone commodity in our modern food system.
Will farmers see an upside?
Some large farmers already warn they simply don’t have the production elasticity needed to increase corn production to offset growing demand, including higher ethanol mandates and targets. These forward-looking producers say they already are coping with increases in input costs, rising land values and other practical day-to-day issues that make large boosts in crop production difficult – if not impossible for many. And, let’s not forget about the weather. Spring is slow to come to the Midwest this year, with planting season already delayed.
In such an environment, don’t expect inflationary pressures on commodity prices and food costs to go away. If anything, the latest ethanol action only adds to worries from consumers and farmers alike about the future price picture for all sorts of food.
This is a double-edged sword: Higher demand for corn – and the support for corn prices it provides – is good for farmers and their bottom line amid dramatically rising production costs. But anyone who goes to the grocery store will see the inflationary prices eating into their wallet.
What would really help gas prices would be to have a solid energy plan that realizes the world is not ready for all renewable energy at this point.
Green energy sounds good but it is not ready for prime time in 2022. We are all very dependent on fossil fuels. Let oil companies drill responsibly, increase the natural gas pipelines, expand nuclear, and keep technology improving for renewable energy. There is not just one answer for energy – it is multi-faceted.
The Bottom Line
Adding more ethanol to the gas pumps sounds like a good idea to curb price increases, but fighting inflation demands a long-term thoughtful approach. E15 gasoline won’t help reduce the pain at the pump we all face. And worse, it may prolong the upward pressure U.S consumers face for our food costs. What will help curb inflation and gas prices is a comprehensive energy plan that includes all resources.