What About the Social Cost of Corn?

Imagine an alternate universe in which a new diet craze began in 2005, where fitness gurus urged Americans to massively increase their corn intake. The spiking prices led farmers to substitute corn for other crops, and to bring new land under cultivation to meet the exploding demand from consumers. Then an Associated Press investigation reveals the dark side to the new fad: Five million acres of land taken out of conservation and turned into farmland, wetlands filled, and water sources polluted with excess fertilizer.[1] Facing such ravages, the government establishes a committee of experts to estimate the “social cost of corn.” This calculation is used to enact a corn tax (levied in dollars per bushel), which will squelch demand and generate revenues to subsidize the development of non-corn food sources.

Something like the above scenario actually did unfold, except for one little detail: The reason for the spike in demand for corn came not from market forces, but from the government. Specifically, the Renewable Fuel Standard (originally passed in 2005 but considerably expanded in 2007) mandated an aggressive expansion of ethanol in the nation’s fuel mix, rising from 9 billion in 2008 to 13 billion gallons by 2012.[2] Combined with a blender’s tax credit and tariff on foreign ethanol (which expired at the end of 2011), federal policies have induced a massive increase in corn production from what the market would naturally have chosen.

Source: U.S. Department of Agriculture

As the graph above illustrates, the U.S. acreage devoted to corn had been fairly flat since the mid 1990s, yet began rising rapidly after 2007, pulling back only slightly because of the onset of the Great Recession in 2008.

It’s not hard to see why U.S. farmers behaved this way. The following chart shows the price of corn:

 Source: USDA 

We see a similar pattern as with our previous chart: a massive spike in corn prices going into 2007, a retreat with the onset of the Great Recession, but elevated prices thereafter. It’s not only corn prices, but all crops, that follow this general pattern. Of course there are complex factors involved in determining market prices, but the government’s ethanol mandate surely played an important role. As farmers substituted out of other crops and into corn, it reduced the relative supply of those other crops, raising their price to make it worthwhile to continue growing them. Thus, the government’s mandate not only pushed up the price of corn, but ag prices in general, including beef and poultry (because they may be raised on feed). This is another reason that even progressives have begun turning their backs on ethanol and other biofuel programs: they contribute to rising global food prices. There’s even a website with the snappy slogan: “Corn For Food Not Fuel.”[3]

However, notice that the chart above also indicates a steady collapse in corn prices throughout 2013. This is partially due to expectations of a revision in the EPA’s mandate for ethanol. These expectations were justified on November 15, when the EPA proposed new levels for its 2014 biofuel mandate.[4] Specifically, EPA reduced the ethanol requirement to 15.21 billion gallons, falling below the critical 10 percent threshold of motor fuel consumption, and 16 percent lower than the original 2014 level as established back in 2007.

The reason for the policy shift is that total motor fuel consumption is lower now—because of the recession and increases in vehicle fuel economy—than analysts had expected back in 2007 when the Renewable Fuel Standard was updated. Since the mandate was expressed in absolute gallons, rather than a percentage of the fuel mix, the original targets would have pushed the ethanol component above the “blend wall.” In other words, the original EPA target for 2014 would have required refiners to mix more ethanol in the fuel mix than could safely be handled by the current fleet.

The official rationale for the ethanol mandate was to promote “renewable” fuels, both for reasons of economic and military security, but also to mitigate the effects of climate change. Yet ironically, as the AP investigation reveals, the crash course in ethanol has not only distorted the economy—it’s also led to massive environmental disruption. At this point, it’s not merely fiscal conservatives who oppose federal support for ethanol; environmental activists are switching camps, too.

The problem isn’t merely that the massive push for ethanol has led to the farming of land formerly managed as conservation land. Ironically, some scientists have challenged the entire premise that ethanol mandates are an effective way to reduce carbon dioxide emissions. For example, if farmers are encouraged by federal policy to plant corn on land that was previously “set aside” for conservation, then the net result is to release more carbon dioxide into the atmosphere than would otherwise have occurred.[5] Considerations such as these led Craig Cox of the Environmental Working Group to declare, “This is an ecological disaster.”

Yet despite the EPA’s merciful nod to reality by easing up on the 2014 mandate, the Obama Administration is by no means throwing in the towel. When speaking to ethanol lobbyists on Capitol Hill, Agriculture Secretary Tom Vilsack reportedly said, “We are committed to this industry because we understand its benefits.” In what was perhaps too candid a statement, he elaborated: “We understand it’s about farm income. It’s about stabilizing and maintaining farm income which is at record levels.”[6]

Vilsack’s admission is the key to unlocking this puzzle. Even though the government would no doubt have vilified the “social cost of corn” (analogous to the “social cost of carbon”) as an extreme environmental threat had these economic and environmental disruptions originated from the market, the Obama Administration instead seems determined to press ahead. In light of the mounting evidence of which the scathing AP investigation is just the latest example, it becomes clear what is actually going on: As Secretary Vilsack explained, it’s about maintaining farm income.

IER Senior Economist Robert P. Murphy authored this post.