Our Alcohol Problem

Jim Schwertner can almost see food prices rising in real time. He only needs to look through the big smudged window behind his paperwork-covered desk. Schwertner’s second-floor office overlooks the dusty pens and loading docks at Capitol Land & Livestock, the sprawling cattle brokerage business that he owns about 45 miles north of Austin.

Capitol Land & Livestock is one of the biggest cattle traders in America, buying, selling and shipping about 3,000 head per day. But by early December, the number of cattle moving through Schwertner’s maze of chutes and pens had fallen about 10 percent from a year earlier.

Schwertner, who has spent his whole life in the cattle industry, sees an obvious culprit: federal mandates that require the use of ethanol in gasoline. Those mandates, particularly the ones ordered by Congress in 2007, led to a surge in corn consumption and corn prices that, according to Schwertner, has whipsawed livestock producers in Texas and the rest of the country. The artificial upward pressure on corn prices caused by the corn ethanol mandates “has hit our livestock producers unreasonably hard,” he says, as the murmuring of cattle reverberates through his office. “It doubled the cost of production for most livestock producers overnight.”

The knock-on effects of those corn price increases are now being felt at the supermarket. And in the meat industry. On Dec. 1, Pilgrim’s Pride, the Pittsburg-based poultry giant headed by one of Texas’ most colorful and controversial businessmen, Bo Pilgrim, declared Chapter 11 bankruptcy. In recent filings with the Securities and Exchange Commission, Pilgrim’s Pride notes that in 2005, the highest price for corn futures was $2.63 per bushel. By 2007 the high price was $4.37, and by last June and July near-month corn futures went over $8.

The spike in grain prices hit Pilgrim’s Pride at a vulnerable time. In 2007, the company acquired rival processor Gold Kist for $1.3 billion. That deal left Pilgrim’s Pride with a huge debt load at the same time that the industry was being hit by a drop in demand for chicken meat.

Although corn futures have recently fallen to about $4, the spike in grain prices has helped feed a surge in food inflation. In mid-January, the Bureau of Labor Statistics reported that food prices jumped nearly 6 percent last year, after rising 4.8 percent in 2007. Some agricultural economists now predict food prices could increase 10 percent in 2009. Worse still, those increases are coming as the global economy is foundering and U.S. unemployment rates are soaring.

Other factors are driving food prices upward: Higher energy prices and increased global demand are among the big ones. But corn ethanol mandates have also been an important factor. The United States is burning food for motor fuel at a time when global grain reserves are at, or near, record lows. Between May 2007 and October 2008, 13 different organizations published studies that found a direct link between food prices and biofuel production. On Oct. 7, the U.N. Food and Agriculture Organization concluded that “Rapidly growing demand for biofuel feedstocks has contributed to higher food prices, which pose an immediate threat to the food security of poor net food buyers (in value terms) in both urban and rural areas.”

In 2006, U.S. farm subsidies to corn farmers totaled $4.9 billion. In addition, according to a recent study by the Environmental Working Group, the corn ethanol sector is reaping about $3 billion per year in federal energy tax credits and subsidies. That’s more than four times as much as the feds are providing to companies working on solar, wind and geothermal power.

The nation now diverts about one-third of its entire corn crop-about 4.1 billion bushels per year-into ethanol distilleries. What are we getting for that? According to the latest data from the Renewable Fuel Association, the United States is producing about 650,000 barrels of corn ethanol per day. That’s the energy equivalent of about 427,000 barrels of oil per day, about 2.2 percent of the country’s total oil needs.

The rest of the world is watching. The U.N. special rapporteur on food issues, Jean Ziegler, has called biofuels “a crime against humanity.” Last year, the World Food Program issued an urgent donor appeal for $500 million to help it feed the world’s poor. The agency said 33 countries in Africa and Asia are facing instability as the urban poor are struggling to find affordable food.

Mounting opposition to corn ethanol, and the spreading global food crisis, pose a serious question for President Barack Obama and Democratic leaders in Washington: Will they attempt to slow or reverse the ethanol mandates?

Over the past year or so, Republicans, including Texas Gov. Rick Perry and Sen. Kay Bailey Hutchison, have led the opposition to federal ethanol mandates. While the GOP’s 2008 national platform included a plank opposing the ethanol mandates, the Democrats’ platform was silent on the issue, saying only that “We’ll invest in advanced biofuels like cellulosic ethanol which will provide American-grown fuel and help free us from the tyranny of oil.” (Cellulosic ethanol can be made from grass, wood chips or other plant material.)

Although the Democrats could have a change of heart on corn ethanol, the momentum behind the mandates, combined with the legislative strength of the farm states, likely means that Democratic leaders in the House and Senate won’t do anything to roll them back anytime soon. Nor is there any sense of urgency coming from the White House or Congress. Obama and his top Cabinet appointees are on record as favoring increased biofuel production. Early indications from the new Congress point to ongoing support for cellulosic ethanol, a fuel that has never been proven commercially viable despite decades of hype. In late January, the House Energy and Commerce Committee approved the energy-related parts of the stimulus package, which included an amendment offering $500 million in loan guarantees for companies working on “leading edge biofuel projects.”

While Democrats are singled out for blame by many ethanol critics, biofuels policies come from years of bipartisan support. Republicans and Democrats, particularly those from farm states, have pushed the mandates as a way to support farmers. But with the Democrats now controlling Congress and the White House, the quandary is now in their hands. And some Republicans, along with both industry and environmental groups, are putting them on the defensive.

Early last year, Jim Schwertner was getting worried about the effects of the corn ethanol mandates on the cattle industry. As corn prices continued to rise, he began reading the text of the 2007 energy bill, a 301-page behemoth that covers a wide range of topics. Schwertner noticed that it allows states to get a waiver from the rules that require ethanol blending in gasoline if they can show that the mandates are causing economic harm.

Schwertner, a Rick Perry supporter, believed that he could get the governor’s backing on the waiver. Before going to the governor, Schwertner called Bo Pilgrim to see if the chicken magnate would be willing to join him. Despite the long-standing enmity between chicken producers and beef producers, Pilgrim quickly agreed they had a mutual interest.

They also had clout. In 2007, according to filings at the Texas Ethics Commission, Pilgrim gave Perry’s campaign a total of $35,500. In May 2008, he gave another $25,000. In 2008, Schwertner gave Perry a total of $9,000.

On March 25, the two men met with Perry in his office. According to Schwertner, Perry quickly understood the issue and told them, “Yeah, I’ll help you. This isn’t good for Texas.”

Less than a week later, on March 31, the Houston Chronicle‘s R.G. Ratcliffe reported that Pilgrim also gave $100,000 to the Republican Governors Association, which Perry chairs. Ethanol boosters immediately latched onto Ratcliffe’s stories, contending that Perry and Pilgrim were involved in a quid pro quo. Rick Tolman, the CEO of the National Corn Growers Association, said in a statement, “This is how politics often works.”

In June, Pilgrim provided Perry with $9,179 worth of air travel to Washington, where the governor held a news conference at the National Press Club to publicize his effort to get a waiver from the federal mandates.

Schwertner says money was never discussed in the meetings he attended with Perry and Pilgrim. “I was with Pilgrim in the meeting,” he said. “It was never part of the discussion that any political contribution would have a payback. Perry doesn’t do business that way. And second, it would be stupid.”

Perry declined repeated requests to be interviewed for this story. His spokesperson, Allison Castle, denied any impropriety, telling Ratcliffe that Perry’s request for the waiver “was the right move for Texas.”

On April 25, Perry sent a letter to Stephen L. Johnson, then the administrator of the Environmental Protection Agency, seeking a waiver from the ethanol mandates. (The EPA manages the provisions of the Clean Air Act, which Congress amended in the 2007 energy bill to include mandates on the amount of renewable fuel that must be consumed.) In his letter, Perry asked the EPA to cut the mandated amount of ethanol to be used in Texas in half. He said the rising cost of corn had led to “a negative impact on the Texas economy of $1.17 billion.” The waiver, he said, “will provide Texans much needed relief at the grocery store and it will ensure that the livestock industry in Texas is able to continue providing a significant source of food products for our nation.”

In May 2008, about two weeks after Perry’s letter to Johnson, Mark Rosegrant of the International Food Policy Research Institute, a think tank whose vision is “a world free of hunger and malnutrition,” testified before the U.S. Senate on biofuels and grain prices. Rosegrant estimated that the ethanol mandates had caused the price of corn to increase 29 percent.

“If the current biofuel expansion continues, calorie availability in developing countries is expected to grow more slowly, and the number of malnourished children is projected to increase,” Rosegrant said. “It is therefore important to find ways to keep biofuels from worsening the food-price crisis. In the short run, removal of ethanol blending mandates and subsidies and ethanol import tariffs, in the United States-together with removal of policies in Europe promoting biofuels-would contribute to lower food prices.”

Rosegrant’s analysis was in line with about a dozen other studies produced by groups ranging from the World Bank to the U.S. Department of Agriculture, all of which concluded that the corn ethanol mandates were raising the cost of food both in the U.S. and around the world. The U.N.’s 138-page report on biofuels concluded that “rapidly growing demand for biofuel feedstocks has contributed to higher food prices, which pose an immediate threat to the food security of poor net food buyers (in value terms) in both urban and rural areas.”

Perry’s request for a waiver from the mandates made national headlines and spurred a move from Hutchison, who is challenging him in the 2010 gubernatorial race. On May 2, Hutchison wrote her own letter to the EPA’s Johnson, saying that the mandates and subsidies for corn ethanol “have contributed to higher domestic and global food prices.” On May 19, Hutchison introduced a bill that would freeze the ethanol mandates by limiting the volume of corn ethanol to be blended into gasoline at 9 billion gallons. Her bill was co-sponsored by 11 other members of the Senate. All of them, including Sen. John Cornyn, were Republicans.

Hutchison’s bill never got out of the Senate Environment and Public Works Committee, which is chaired by California Democrat Barbara Boxer. In fact, Hutchison couldn’t even get Boxer to schedule a hearing on the measure.

The old adage that politics sometimes makes for strange bedfellows was proven a few weeks after Perry sent his letter to the EPA. Three national environmental groups-the Clean Air Task Force, Environmental Working Group, and Friends of the Earth-told federal regulators that they were supporting Perry’s waiver request.

These clean-air advocates contend that the growing use of ethanol in gasoline is adding to the smog in America’s cities. William Becker, executive director of the National Association of Clean Air Agencies, which represents air pollution control authorities from 49 states and several territories, as well as local agencies from 165 metro areas, said last year that Congress “decided to mandate ethanol without first analyzing the air quality impacts.”

Ethanol-blended gasoline is more likely to seep through the seals and gaskets in car engines (a process known as permeation), which also puts more hydrocarbons into the atmosphere. The increase in airborne hydrocarbons often means increases in pollutants like ground-level ozone. For Becker, the conclusion is crystal clear: “More ethanol means more air pollution. Period.”

In early August 2008, the EPA officially denied Perry’s request to opt out of the federal ethanol mandates. In a statement, Johnson said that the ethanol requirements are “strengthening our nation’s energy security and supporting American farming communities.” And, he added, they are not causing “severe harm to the economy or the environment.”

The politics behind the decision cannot be ignored. Republicans deserve a fair share of the blame for the ethanol movement, which can be traced back to the 1970s when Bob Dole, the Republican Senator from Kansas, sponsored legislation to promote the fuel. Another Republican, George W. Bush, was in the White House when the EPA rejected Perry’s request. Charles Grassley, the Republican senator from Iowa, has been a persistent and powerful ethanol advocate.

The EPA’s decision was immediately denounced by Frank O’Donnell, the president of Clean Air Watch, who wrote that “Corn-based ethanol isn’t just raising food prices. It is causing more smog, adding to global warming, and causing more water pollution.”

While O’Donnell jeered, Iowa’s Democratic Sen. Tom Harkin cheered. “Biofuels are one of the most important tools we have to reduce our dependence on foreign oil,” he said. “I commend EPA for denying this waiver and indicating that our country will continue to maintain a strong commitment to renewable energy.” Of course, Harkin, like Grassley, represents the country’s biggest ethanol-producing state. As chairman of the powerful Senate Committee on Agriculture, Nutrition and Forestry, he is also one of the chief obstacles to ethanol reform.

Given the Democrats’ dominance on Capitol Hill and the makeup of Obama’s new leadership team, Guy Caruso expects to see little change on the biofuels issue. Caruso, who was administrator of the Energy Information Administration from 2002 until September 2008, said he is “getting signals that they are even more supportive of biofuels in general. They might try to promote cellulosic ethanol more than corn, but I’m not getting any signals that they are thinking of rolling back biofuels.”

Caruso, now a senior energy and security adviser at the Center for Strategic and International Studies, said that while few Democrats want to talk about corn ethanol, their popular talking point is cellulosic ethanol. And, he added, “I don’t see anybody on the [Democrats’] team who’s in favor of rolling things back.”

Cellulosic ethanol has been talked about since the 1920s, when an inventor named Thomas Midgley proposed that the United States could run all of its cars on fuel made from “straw, corn stalks, corn cobs and all similar sorts of material we throw away.” More recently, cellulosic ethanol has been promoted by a who’s who of American politics, including Harkin, Obama, Al Gore, John McCain, Bill Clinton, George W. Bush, former CIA director James Woolsey and media darling Amory Lovins.

Despite the hype, cellulosic ethanol is no closer to commercial viability than it was when Mid
ley first proposed it. Turning switchgrass, straw or corn cobs into sizable volumes of motor fuel simply requires too much farmland. Its environmental effects have also been called into question. A September 2008 study on alternative automotive fuels done by Jan Kreider, a professor emeritus of engineering at the University of Colorado, and Peter Curtiss, a Boulder engineer, found that the production of cellulosic ethanol required about 42 times as much water and emitted about 50 percent more carbon dioxide than standard gasoline. Furthermore, they found that, as with corn ethanol, the amount of energy that could be gained by producing cellulosic ethanol was negligible.

But Democrats continue to push for more biofuels. Speaker of the House Nancy Pelosi has been promoting biofuels since 2006, when the Democrats issued their “New Direction” agenda. Pelosi said that her plan for “energy independence” would provide “tax incentives to encourage increased biofuel production, increase the number of flex fuel cars” and “expand ethanol use.” In May 2008, she touted the passage of the subsidy-packed $307 billion farm bill, declaring that it was an “investment in energy independence” providing “support for the transition to cellulosic ethanol.”

Rep. Collin Peterson, a Democrat from Minnesota, the fourth-largest ethanol-producing state, heads the House Agriculture Committee. Peterson has led efforts to keep in place a 54-cent-per-gallon tariff on imported ethanol, which props up prices by stifling competition for the U.S. product, and has dismissed the idea that corn ethanol is driving up food prices.

President Obama appears unlikely to challenge his party’s orthodoxy. On Nov. 3, the day before his election, Heather Zichal, the Obama campaign’s senior energy adviser, told Bloomberg News that Obama “recognizes how important the renewable and biofuels industry is to creating jobs and meeting our goal of reducing dependence on foreign oil. … He’s fully committed to it and sees tremendous value in the renewable fuels standard and continuing down this path.”

In mid-December, Obama announced that former Iowa governor Tom Vilsack would be the next secretary of agriculture and that Sen. Ken Salazar of Colorado would head the Interior Department. Obama said they would be part of the “team we need” to strengthen rural America, create “green jobs” and “free our nation from its dependence on oil.”

Vilsack and Salazar are longtime biofuels boosters. While governor of Iowa, Vilsack promoted corn ethanol production and cellulosic ethanol. During a brief run for president, Vilsack said he wanted to have the country producing 60 billion gallons of renewable fuel per year by 2030. Salazar has joined forces with Set America Free, a group founded by pro-Iraq War neoconservatives, by endorsing legislation that will require automakers to manufacture “flex-fuel” cars that can burn ethanol or methanol. And like Vilsack, Salazar continues to promote cellulosic ethanol.

On Jan. 20, during his inaugural address, Obama appeared to indicate that ethanol will continue to be a priority when he promised that “we will harness the sun and the winds and the soil to fuel our cars and run our factories.”

Critics believe the underlying problem with biofuels-whether it is cellulosic ethanol, soybean-based biodiesel, corn ethanol or other plant sources-is the same: the lack of productive arable land. The more land that is dedicated to growing crops to feed cars, the less there is available to grow crops that feed livestock and people. And when food production declines, prices tend to rise.

Although food prices are clearly headed up, there are some positive signs. Global grain harvests were good in 2008, with global cereal production up about 4.9 percent. And deflation throughout the U.S. economy is helping to slow food price increases. Meanwhile, the corn ethanol industry is being rocked by collapsing stock prices, bankruptcies and plant closures. In October, VeraSun Energy, the second-largest ethanol producer in the country, declared bankruptcy. About half a dozen ethanol distilleries have been idled since Jan. 1.

Nevertheless, food inflation will likely continue-and may be most obvious on the meat aisle. Industry groups say that meat prices will rise this year by 10 percent. The pending jump in prices will be caused in part by what Jim Schwertner sees outside his office window: decreasing livestock production because of high feed prices. Recent government data indicated that chicken production will decrease about 8 percent this year, turkey output by about 12 percent and cattle output by about 7 percent.

Those numbers leave Schwertner shaking his head. The corn ethanol business is making “food sky-high at the worst possible time for the American consumer,” he says. “It’s a travesty.”

Robert Bryce, a contributing writer for the Observer, is the managing editor of Houston-based Energy Tribune magazine and author of three books, including Gusher of Lies: The Dangerous Delusions of “Energy Independence” (2008).

Investigative reporting for this article was supported, in part, by a grant from the Open Society Institute.