Something does not compute in federal policies right now. The government subsidizes ethanol production by 51 cents per gallon and members of Congress are falling all over one another demanding even greater incentives.
At the same time, the U.S. Army Corps of Engineers wants to spend $2 billion enlarging locks on the Upper Mississippi River. Handling increased grain exports is a prime justification for this expenditure. The problem is that increased ethanol use will cut grain exports. Thus, we have two taxpayer-funded initiatives in conflict.
Ethanol output is rising. Ethanol has been long dominated by a few large companies, notably Archer Daniels Midland, coupled with many small farmer-owned cooperatives. Now, outside investors are piling in as investment banks like Goldman Sachs see a potential boom.
This year, for the first time, corn used for ethanol will exceed the amount of corn exported.
The Corps of Engineers continues to tout its project to increase barge capacity on the Upper Mississippi. The cost-benefit study assumes grain exports will increase or at least stay constant. It ignores how ethanol production will absorb large quantities of corn that otherwise might be exported.
Shipping interests have advocated enlarging locks and dams to accommodate longer barge tows that currently must be split in two to pass most locks. But environmental groups and others have opposed the expansion.
After years of dispute, Lock and Dam 26 at Alton, Ill., was replaced by a new structure in 1989. In justifying that project, the Corps projected that 123 million tons of commercial traffic would pass through the new lock by 2000. The actual figure turned out to be 73 million.
Nevertheless, the Corps asked for additional funds for more lock replacements. In 2000, a Corps analyst blew the whistle, telling Congress that he had been pressured by superiors to artificially inflate benefits to justify a $1.2 billion project. They had ordered him to include estimates in growth of grain exports that he knew were bogus.
The Army’s inspector general found that the whistle-blower indeed had been illegally pressured. The Corps had its hand slapped. A National Academy of Science panel concluded that the Corps’ benefit estimates were bogus, particularly in regard to grain shipments.
However, the Corps came back in 2004 after having doubled the cost and tacked on some $5 billion in “environmental” improvements to buy off opposition. Their new studies, carried out before gas prices spiked, included highly optimistic estimates of grain exports.
If oil prices remain high, demand for ethanol — even without government subsidies — fundamentally will alter corn prices and historic patterns of use. That will be good for Midwestern farmers (and for landowners like me who historically capture most benefits of higher prices). But it also means we would waste taxpayer dollars building new locks on the Mississippi.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.