In recent weeks, ethanol producers have called for expanding the powers used by the U.S. Department of Agriculture’s Commodity Credit Corporation (CCC) to bail out their industry to offset losses from the pandemic. Their call was echoed by members of Congress of the main corn producing states. While the industry has suffered losses, a bailout is a bad idea. The losses are far less than those claimed and the extension of payments under the CCC would set an even worse precedent.
Like other manufacturers, the ethanol industry has been hit hard by the pandemic. Lockdown and quarantine policies have resulted in fewer car trips, leading to significant reductions in fuel consumption. The Energy information administration predicts that fuel production will decline by nearly 15 billion gallons in 2020 from levels a year ago. Less fuel consumed means less ethanol, which is blended with gasoline and accounts for about 10 percent of the gasoline supply. Total ethanol production is expected to decline by 1.7 billion gallons in 2020.
The Renewable Fuels Association states that the pandemic revenue losses due to the decline in ethanol production will reach $ 7 billion in 2020. This figure only counts the gross revenue, that is, the value of the sale of ethanol and other by-products of ethanol production such as the sale of dried grain and corn oil stills. However, this loss calculation does not take into account the fact that the plant does not incur the costs of producing ethanol, the most important of which is the costs of raw materials, mainly corn. Less ethanol produced means less corn purchased and lower corn prices. US Department of Agriculture (USDA) predicts that corn used in ethanol production will decline by nearly 600 million bushels and that corn prices have fallen as 10 to 15 percent Therefore. But these losses were made up – corn farmers received more than $ 1.1 billion in payments for 2019 crops that were not yet marketed as of January 15.
The net losses for ethanol producers are much lower once the corn purchase costs and other lost operating costs are excluded. Research by the University of Illinois suggests that the ethanol industry’s net profits have averaged about $ 0.05 per gallon over the past four years. Indeed, the negative profitability in 2019 led to the voluntary closure of some ethanol plants because the the price of ethanol has fallen below the so-called closing price.
Based on an average profitability of $ 0.05 per gallon, losses to the ethanol industry are expected to be around $ 85 million (0.05 times 1.7 billion gallons). These are significant losses, but still a fraction of the $ 7 billion claimed by the ethanol industry. In addition, some of these losses have already been offset by the paycheck protection program. A scan of the Small Business Administration’s PPP database identifies at least 33 ethanol plants who have taken out loans totaling between $ 25 million and $ 60 million. These loans are expected to help prevent layoffs until the industry recovers as the economy strengthens and gasoline consumption recovers.
Finally, extending compensation to the ethanol industry using USDA’s authority under the Commodity Credit Corporation Charter Act would be to abuse legislation aimed at farmers, not downstream industries like the ethanol. Recent legislation co-sponsored by Sens. Chuck grassleyChuck Grassley Biparty Senators Introduce Bill to Improve Camera Systems in Federal Prisons Grassley Announces Re-election (R-Iowa) and Amy KlobucharAmy Klobuchar Debt fight reignites Democrats’ obstruction on Hillicon Valley – Brought to you by Ericsson – Facebook faces criticism over child safety Hillicon Valley – Brought to you by Xerox – Officials want action against cyber attacks MORE (D-Minn.) Would reimburse ethanol producers for the value of inventories of raw materials purchased between January 1 and March 31. this period or the feedlot operators who buy corn and products to feed the animals? Fluctuations in grain prices are standard operating risks for those holding stocks. In addition, futures markets allow stockholders to effectively manage these risks. Compensating the ethanol producers would only open the door to further claims. It is a bad precedent and a bad policy.
Joseph Glauber is a Senior Fellow at the International Food Policy Research Institute and Visiting Fellow at the American Enterprise Institute. He was Chief Economist at the United States Department of Agriculture from 2008 to 2014.