When State-Subsidized Industries Attack Each Other

When State-Subsidized Industries Attack Each Other
August 12, 2014

Recently, a corn ethanol plant in Nebraska that switched to using cheaper sugar to produce biofuel was sued by local corn farmers. The dispute allows a glimpse into the clashing worlds of subsidized agriculture, and highlights what happens when people make market-oriented decisions within the tangled framework of the state-directed economy.

Corn and sugar are two of the most important agricultural commodities, and have been produced by humans for thousands of years. The U.S. corn belt is where approximately 40 percent of the world’s corn crop is grown, whereas sugar is produced in other countries (the U.S. imports sugar). Global corn ending stocks, which are the amount of supply on hand, fluctuate over time. This and other factors cause the price of corn to rise and fall to reflect these market conditions.

When corn is plentiful and prices are low, it makes economic sense to use it for other products, such as producing the sweetener high-fructose corn syrup and the biofuel ethanol. When corn prices increase, from expanded global demand as a food product, or as livestock feed in response to high demand for meat, or from one of the periods of low ending stocks, the production of ethanol or corn syrup cannot be justified economically.

Government Manipulation

Enter the government. This relationship between corn and sugar has been exploited by the U.S. government for some time. In order to artificially elevate the price of sugar in the United States, a tariff on cheap foreign sugar has been imposed since the 1980s. This makes using corn-based sweetener more attractive.

In addition, the USDA protects domestic sugar producers by guaranteeing minimum prices for sugar loans, and by buying sugar for auction, to be used for nonfood purposes, when the sugar price falls below these minimums. Having not forgotten about the ethanol producers, the United States has slapped an import tariff on foreign (sugar-based) fuel ethanol, while providing a subsidy for U.S. (corn-based) fuel ethanol.

Setting the stage for the current battle, recently the U.S. government, through the Feedstock Flexibility Program, has been allowing ethanol plants (including the one in Nebraska in question here) to purchase cheap sugar from government auctions (remember the protections given to domestic sugar producers) to make ethanol from sugar (because the price of corn was relatively high). Thus, a lawsuit filed by the Nebraska farmer’s co-op that had been supplying the corn states the ethanol plant violated its obligations by using the rail line (owned by the co-op) to haul sugar, and by not buying corn to make the ethanol.

Free Market, No Dispute

Although the current claims made by the corn farmer’s co-op against the ethanol plant may indeed demonstrate breach of contract, the entire underlying framework that established everything here is only possible due to the state-supported nature of the marketplace. This dispute would not have happened in a free market.

State intervention caused this dispute. If the government had not bought up cheap U.S. sugar, propped up the U.S. corn ethanol industry, and then allowed ethanol plants to purchase that artificially cheap sugar from the government to restart idled processing lines, this lawsuit on behalf of the “damaged” corn producers would have never happened.

In a free market, inexpensive sugar from countries outside the United States would flood the market for use in food products, and some of it would likely be used to produce fuel ethanol. More of the plants might be located near ports to minimize transportation costs. More corn may have then been available for traditional food and livestock feed uses, which have been the primary uses for thousands of years.

Market Sense, Legal Woe

Perhaps the worst thing about all of this is that the ethanol plant was attempting to purchase a cheaper alternative feedstock to restart operation. In 2012, the ethanol company did not purchase corn as prices rose, and only operated the plant for two weeks that year. Both of these were logical, market-driven decisions, and they have resulted in legal action against the ethanol company.

Although state support of an industry may seem like a gift at the beginning, the distorted framework of the government-directed economy makes everyone worse off. Instead of focusing on producing commodities based on actual market conditions, which come from consumers, companies are forced to use gimmicks and beg for favors from the government.

Consumers are the ultimate losers when this happens.

Dave Albin (david_m_albin@yahoo.com) conducts process development research and provides technical support for a food equipment manufacturer in Iowa. Used with permission of Mises Daily at Mises.org.