Biofuels Debate Heats Up

Iowa agriculture is booming now, but disaster looms on the horizon. An anti-ethanol media storm threatens to further destabilize commodities markets by undermining political support for biofuels.

After a long decline, agriculture in Iowa is surging, in part because Congress ordered the eventual production of 15 billion gallons of ethanol, distilled from corn. As a result, land given to corn for fuel now competes with land given to corn for grain and food. The increase in demand helped push corn prices to record levels, which is why Iowa farmers are thriving.

As such, the Corn Belt owes much of its good fortune to congressional politics, rather than market forces. But in an age of the 24/7 news cycle and poll-driven policy, political support for ethanol is even more volatile than the price of commodities on the Chicago Board of Trade, and ethanol’s political situation has worsened dramatically in the past few months. That should worry Iowa farmers. After all, government giveth, government taketh away.

When Congress voted to support ethanol last December, it was touted as an environmentally friendly miracle fuel that could reduce U.S. dependence on Middle Eastern oil. Farmers, environmentalists and national-security hawks came together to form a pro-ethanol coalition.

But the prevailing political winds began to shift against ethanol in March, when Time Magazine ran a scathing cover story, "The Clean Energy Scam," blaming corn fuel for a bevy of environmental problems, from polluting America’s watersheds to accelerating climate change.

Then, in April, riots broke out over skyrocketing food prices in urban Asia, Africa and Central America. Ethanol may not be the only reason food is so expensive, but it is the most sensational. As unrest intensified, the talking heads began clamoring about the downside of burning food for fuel.

All this negative press has undermined two of ethanol’s key constituencies. Environmentalists are put off by ethanol’s big carbon footprint, while national-security hawks worry about the destabilizing effects of ethanol on the developing world, a historical breeding ground for terrorism.

The media’s anti-ethanol drumbeat is starting to get the attention of political players. A House committee in Missouri, part of the Corn Belt, is considering a measure to eliminate the state’s ethanol requirement. In late April, Texas Gov. Rick Perry sent a letter to the Environmental Protection Agency seeking a waiver for half of the national corn-ethanol mandate.

In Congress, 24 Republican senators, including presumptive Republican nominee John McCain, signed on to Perry’s letter.

Sen. Kay Bailey Hutchison, R-Texas, is drafting legislation to freeze the ethanol production quota at current levels. In the House, Rep. Jeff Flake, R-Arizona, introduced a bill to eliminate all federal supports for ethanol.

A bipartisan team of negotiators for the new farm bill has agreed to reduce federal ethanol subsidies, reportedly in response to the criticism. Sen. Dick Durbin, D-Illinois, who represents the country’s No. 2 corn-producing state, told reporters that Congress had to take "a closer look" at its ethanol policy. And in a hearing last week, Rep. Jane Harmon, D-Calif., said, "Our enthusiasm for corn ethanol deserves a second look."

Of course, drastic action in Congress is unlikely. But support for "doing something" is growing.

Even before the media turned on ethanol, commodities markets were growing volatile because of record prices and subsequent speculation. A legislative assault on ethanol would add further uncertainty to the market, eroding price stability and endangering the utility of futures contracts and options – the two hedges that have protected Iowa farmers for a half-century from the boom-and-bust cycle that plagued their forefathers.

Buckle your seat belts, Iowa. The fickle politics of ethanol are about to take the Hawkeye State on a wild ride.