How To Fix The Ethanol Industry

In the previous column, I described what I believe are the problems with the nation’s ethanol program. In a nutshell, the U.S. government creates demand for ethanol via federal mandate. This mandate pits states, powerful public interests, and various political groups against each other. As a result, proponents and opponents fight a never-ending war around these mandates. This means there is year-to-year uncertainty that impacts ethanol producers.

The ethanol mandate is unpopular in states that don’t produce much ethanol, in the refining industry, among environmental groups, and among many food manufacturers (who feel it artificially drives up the cost of corn).

Supporters of the mandate include large swaths of the Midwest, where ethanol supports numerous jobs — both in the ethanol industry and among corn farmers. This support includes a powerful farm lobby, and a powerful bipartisan block of farm state senators that consistently supports ethanol.

The key problem is that creating demand by mandate has simply not worked to produce a self-sufficient ethanol industry. Nor has it created widespread prosperity for corn farmers. Farm bankruptcies are steadily rising. Over the past year farm bankruptcies were up 13%. The past year has seen more farm bankruptcy filings than any year since 2012.

If the ethanol mandate was suddenly removed, the ethanol industry would collapse. Thus, the industry is forced into a perpetual cycle of lobbying to ensure that the federal government keeps them in business.

I would argue that there is a far better model for the U.S. ethanol industry. In this model, the entities that control the model are the same as those that benefit from it: The Midwestern states that produce essentially all of the nation’s ethanol.