Renewable fuel standards caused a misallocation of resources by farmers
Tom Elam:
...The RFS program created an artificial market for an unneeded resource. The sooner everyone admits it is a mistake the better off all of us will be.
Starting in 2005, the artificial demand created by the RFS biofuel mandate caused corn and soybean prices to temporarily soar. In response to those temporary high prices, and to meet federal government ethanol targets, farmers converted about 16 million acres of wheat, sorghum and other crops to corn and soybean production. Functioning as a corn production mandate, the RFS has radically transformed the agricultural landscape in America — particularly in the Midwest.
The resulting and systemic overproduction is a key reason why our country now suffers from a corn glut. And as basic economics teach, an oversupply typically results in a reduction in prices.
Actual market demand for corn and soy-based biofuels has never matched up to the ambitious mandate levels set by the federal government back in 2007. Still, crop production is linked to mandate volume, and high production levels are continuing to depress commodity prices. Add cheap corn to increasing costs for other operational factors, and it makes sense that farm incomes are taking a hit.
Mandate proponents like Santorum argue that the RFS is a lifeline to farmers and a solution to their declining incomes. They claim that even higher biofuel mandates and government-funded infrastructure to enable broader sale of E15 and flex fuels will give the oversupply of feedstock crops somewhere to go, solving the glut and helping recover incomes. But this fails to acknowledge that the RFS played a role in creating the current problem in the first place.
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