Don’t bail out ethanol
In recent weeks, there have been calls from ethanol producers to extend the authorities used by the U.S. Department of Agriculture’s Commodity Credit Corporation (CCC) to provide a bailout to their industry to compensate for losses due to the pandemic. Their call has been echoed by members of Congress from key corn producing states. While the industry has suffered losses, a bailout is a bad idea. Losses are far less than claimed and extending payments under the CCC would set an even worse precedent.
Like other manufacturers, the ethanol industry has been hard hit by the pandemic. Lockdown and quarantine policies have meant less car travel, resulting in significant drops in motor fuel consumption. The Energy Information Administration forecasts that motor fuel production will decline by almost 15 billion gallons in 2020 compared to year-ago levels. Less fuel consumed means less ethanol, which is blended with gasoline and accounts for about 10 percent of gasoline supply. Total ethanol production is forecast to decline by 1.7 billion gallons in 2020.
The Renewable Fuels Association states that pandemic-revenue losses due to the drop in ethanol production will top $7 billion in 2020. That figure counts gross revenues only — that is, the value of the sale of ethanol and other byproducts of ethanol production such as the sale of distillers dried grains and corn oil. However, that loss calculation ignores the fact that the plant does not incur the costs to produce ethanol, the largest of these being the costs of feedstocks, primarily corn. Less ethanol produced means less corn purchased and lower corn prices. U.S. Department of Agriculture (USDA) projects that corn used in ethanol production will decline by almost 600 million bushels and corn prices have fallen as 10 to 15 percent as a result. But those losses have been compensated — corn producers have received over $1.1 billion in payments for 2019 crops that were not yet marketed as of Jan. 15.
Net losses to ethanol producers are far smaller once the costs of corn purchases and other foregone operating costs are excluded. Research by the University of Illinois suggests that net profits to the ethanol industry have averaged about $0.05 per gallon over the past four years. In fact, negative profitability in 2019 resulted in the voluntary shutdown of some ethanol plants as the price of ethanol fell below the so-called shutdown price.
Based on an average profitability of $0.05 per gallon, losses to the ethanol industry are projected to be about $85 million ($0.05 times 1.7 billion gallons). Those are significant losses but still a fraction of the $7 billion claimed by the ethanol industry. Moreover, some of those losses have already been offset through the Paycheck Protection Program. An analysis of the Small Business Administration PPP database identifies at least 33 ethanol plants that have taken loans totaling between $25 million and $60 million. Those loans should help prevent layoffs until the industry picks up as the economy regains steam and gasoline consumption recovers.
Lastly, extending compensation to the ethanol industry using USDA’s authority under the Commodity Credit Corporation Charter Act would misuse legislation that was intended for farmers, not downstream industries like ethanol. Recent legislation co-sponsored by Sens. Chuck Grassley (R-Iowa) and Amy Klobuchar (D-Minn.) would reimburse ethanol producers for the value of feedstock inventory purchased between Jan. 1 and March 31. But if one compensates the ethanol industry, why not compensate others, such as grain merchants who were storing corn and other grains over that period or feedlot operators who buy corn and products to feed animals? Grain price fluctuations are standard operating risks for those holding inventories. Moreover, futures markets allow inventory holders ways to effectively manage those risks. Compensating ethanol producers would just open the door for other claims. It is bad precedent and bad policy.
Joseph Glauber is a senior research fellow at the International Food Policy Research Institute and Visiting scholar at the American Enterprise Institute. He was chief economist at the U.S. Department of Agriculture from 2008 to 2014.
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