Current U.S. president and former New York real estate developer Donald Trump might might not have fully realized the power of ethanol in the politics of America’s heartland.
But he is learning now that the ethanol industry, which generates US$45 billion in economic activity annually, mostly in Midwestern farm states, can’t be treated in a cavalier fashion.
Almost since the beginning of Trump’s presidency a battle has been waged in the swamp of U.S. biofuel policy.
Who wins is important to Canadian farmers because that policy is what makes U.S. ethanol production hugely successful, processing 40 percent of America’s giant corn crop.
If that demand were to be severely restricted it would create a huge corn surplus that would sink the corn market and pull down other crop markets with it.
It is worth reminding ourselves of the impact of the U.S. ethanol industry.
The 40 percent of American corn production that goes into ethanol is a staggering 142.8 million tonnes. That is about equal to all the corn grown in South America. That is more than four times bigger than Canada’s entire wheat crop.
Corn prices that averaged $3.68 per bushel in 2015, would have averaged only $2.75 without the regulations requiring ethanol use, according to a study published in the American Journal of Agricultural Economics.
The industry creates about 72,000 direct jobs in the U.S. and 285,000 indirect and induced jobs, according to a report by Agricultural and Biofuels Consulting, commissioned by the Renewable Fuels Association.
These jobs and economic activity are concentrated in rural areas that voted strongly in favour of Trump.
But he apparently did not fully appreciate the passion for ethanol in those areas when his buddy and oil refinery owner billionaire Carl Icahn wanted administration support to change aspects of the Renewable Fuel Standards (RFS) program that he said hurt small refineries like his.
Environmental Protection Agency administrator Scott Pruitt, a Trump appointee and a long time supporter of the oil industry, came up with a plan to give waivers to small refiners to allow them to avoid certain RFS requirements and to negotiate a wider agreement that would address other refiner desires but also give Midwest farmers and ethanol makers something they want, the ability to sell E15 fuel year round, ending the current regulation that allows only E10 ethanol during the summer.
The situation, including trade implications that irritated Canada, was laid out in detail in a story by Sean Pratt in the May 31 Producer.
The carrot in the form of the E15 extension was not enough to mollify the agriculture and ethanol proponents who said Pruitt’s plan would reduce ethanol production and open U.S. ethanol exports to trade complaints.
Voters in farm states are already frustrated over Trump’s trade battles with China, NAFTA partners Canada and Mexico, and the European Community. They worry the frictions will limit demand for American agricultural products. Republican leaders warned the trade and ethanol issues could cause the party headaches in the midterm elections this fall.
So last week it appeared Trump and his administration were backing down, putting the ethanol policy matter on indefinite hold.
Trump tweeted that he “did a big, big favor for farmers,” as though it was a personal royal favour rather than a political decision.
Of course the issue could come back once the midterms are over.
All this helps to underline how biofuel production is dependant on government intervention. This is true not just in the United States, but also in Canada, Europe, palm oil producers Indonesia and Malaysia and recently China.
In some cases governments offer a financial subsidy for producing biofuel but the biggest supports are the mandates that require a percentage of the country’s fuel supply have biofuel content.
Governments issue these mandates on the argument that using biofuel reduces carbon emissions causing climate change.
The mandates also help to consume surplus production that would otherwise drive down crop prices, potentially triggering other farm support plans funded by the taxpayer.
Another incentive for countries that don’t have large petroleum resources is that using home-grown biofuel reduces the need to import expensive crude oil, helping to balance trade deficits.
There are duelling studies on whether biofuels, once all inputs and other factors are taken into account, really do lower carbon emissions.
One thing the studies agree on is that biofuels made from biomass such as crop residue, switchgrass and fast growing poplar have a smaller carbon footprint that those made from food crops.
But because of technology limitations and economics, very little of the globe’s biofuel comes from biomass. In the U.S. it is only about one percent.
A lot of money is going into research and development for biomass biofuel so that might change, but the research has been going on for a long time and it appears breakthroughs are more difficult that first thought.
I’ll wrap up with the following observation.
Many North American farmers question the idea of human induced climate change and therefore are against carbon reduction strategies such as a tax on carbon.
Nevertheless you don’t hear a lot of farmer complaints about biofuel subsidies and mandates that are sold to the taxpaying public, at least in part, as a strategy to lower carbon emissions and fight climate change.
Indeed, as we see in the United States, even Donald Trump is afraid to mess with biofuel policies that are favourable to farmers.