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Do Farmers Benefit from Biofuels?

By: Dennis Keeney

Biofuels, particularly corn-based ethanol, offered the promise of large financial returns to both the farmer and to the rural community. Have these promises been realized? And how have the small-scale farmers fared against the land barons?

Locally sourced biofuels offer potential financial benefits:

  • Increase in corn (and other starch grain) prices and oil seed prices, resulting from increased demand
  • Opportunity for investment in infrastructure through stock options or cooperatives
  • Greater employment opportunities for rural community

Potential drawbacks include

  • Increase in land and input prices, resulting from high corn prices
  • Increase in cost of animal feeds, resulting from f high corn prices
  • Costs of infrastructure to local governments
  • Wear and tear on roads
  • Enhanced air and water pollution from nitrate and pesticides
  • Biodiversity issues associated with trend toward row crops

Backlash and Risk

Financially, biofuels have turned out to be a bit of a slippery slope. To ensure their success, the government subsidized their production and marketing. This led to backlashes when food prices rose; the rise in food prices occurred, in part, because of the increase in corn prices. The public relations fallout was unexpectedly high. In recent years, as federal and state budgets have tightened, the press, animal producers, and some political leaders have launched a public offensive against biofuels, costing the farmer credibility and support when the farmers need it most. Oil producing states have been particularly aggressive in criticizing biofuels.

A truism in agriculture is that profits abhor a vacuum. Theoretically, agriculture is a purely competitive industry. When high profits happen in a competitive environment such as agriculture, prices will rise elsewhere to even out the profits; everyone wants some of the action. Land prices and land rental costs have doubled or tripled in some of the most productive areas of the U.S. Not to be outdone, input prices (machinery, pesticides, fertilizer and fuel) have skyrocketed. At the end of the day, net profits have changed little. But risks have increased. And the increase in risks is not good for agriculture. When smaller-scale, less-leveraged farmers risk and lose, they go broke, and their land is taken over by larger units. Not only are people’s lives put on hold, but smaller-scale farms and farmers lose out to large, well-financed land barons.

Outrageous Claims and Bankruptcy

Even with government backing, ethanol and biodiesel production has been high risk, leading to failures of ethanol plants. Bankruptcy hurts all who have vested interest in the plants, and many farm families have ended up with worthless stock. While “buyer beware” should be the principle of investment, government encouragement of investment led to many farmers to make unwise decisions.

Ethanol plants especially were touted as sources of employment for the local community. Outrageous employment claims were made by industry and government supporters, but have not proven accurate. Economists warned that a typical ethanol plant would only support about 50 jobs after the construction phase was completed. The economists proved to be correct. And the taxpayers were left wondering where all that job development went.

Unintended Consequences

While most refineries have not been a source of point pollution, the high corn prices have encouraged more corn on the landscape, leading to greater potential for nitrate and pesticide in ground and surface water. Pest resistance has increased, especially resistance of weeds to herbicides. The increased amount of corn has the potential to lower biodiversity even further. Economic fallout includes costs of cleanup and costs of moving to far more expensive pest control programs.

As with many economic issues, there is no “control,” so we will never be sure if ethanol and biodiesel had a net positive, negative or neutral effect on the rural economy. Many, if not all, of the negative economic aspects of biofuels were unpredicted and therefore “unintended consequences.”  At any rate, they happened, and retracing ours steps is not possible. But they should be recognized and quantified as much as possible. Agricultural policy that is based on what has happened in the past will be much more likely to be correct than policy based on perceptions and politics.

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