A Growing Disaster

THE ethanol industry, once the darling of corn growers, environmentalists and the auto industry, has fallen on hard times. Producers spent this year caught between falling ethanol prices and rising corn costs, causing many to go bankrupt. In response, they are pushing the Environmental Protection Agency to increase the amount of ethanol they can blend into gasoline to 15 percent, up from the current 10 percent. Allowing this, however, would only double down on a discredited environmental policy without solving the industry

That problem is simple: Ethanol prices trend higher and lower along with the price of gasoline, yet the cost of producing ethanol tends to rise with demand, since higher ethanol production exerts upward pressure on the price of corn. In a free market, corn prices might be expected to eventually fall as the market adjusts to increased demand. But because the government heavily promotes ethanol use through subsidies and regulation, the market is continually strained.

The problem is magnified because corn is a water- and fertilizer-intensive crop that requires considerable investment. Worse, since fertilizer is often an oil-based product, the cost of growing corn tends to rise at the very moment ethanol prices, which rise with oil prices, might bring a good return.

The ethanol industry has less incentive to control its costs and diversify its market as long as the federal government guarantees it a place at the pump.

NY Times