ADM and Early Ethanol Subsidies: ‘A Case Study in Corporate Welfare’ (Dwayne Andreas remembered)

“Using ethanol for vehicle fuel is hardly a new practice. In fact, ethanol has been used for fuel for more than 100 years. A USDA report noted, ‘The use of alcohol as an automobile fuel dates back to the first modern internal combustion engine, the Otto Cycle (1876), which used alcohol as well as gasoline. Henry Ford designed the Model T (1908) to use alcohol, gasoline, or any mixture of them.’”

In September 1995, the Cato Institute published Policy Analysis No. 241 by then associate policy analyst at Cato, James Bovard. “Archer Daniels Midland: A Case Study in Corporate Welfare” is at once eye-opening and infuriating. ADM was not only the “most prominent” but also the “most arrogant” recipient of special government (read taxpayer/consumer) favor in the U.S. Only Ken Lay’s Enron, on a much broader basis, could rival ADM chair Dwayne Andreas.

Bovard’s executive summary follows:

The Archer Daniels Midland Corporation (ADM) has been the most prominent recipient of corporate welfare in recent U.S. history. ADM and its chairman Dwayne Andreas have lavishly fertilized both political parties with millions of dollars in handouts and in return have reaped billion-dollar windfalls from taxpayers and consumers.

Thanks to federal protection of the domestic sugar industry, ethanol subsidies, subsidized grain exports, and various other programs, ADM has cost the American economy billions of dollars since 1980 and has indirectly cost Americans tens of billions of dollars in higher prices and higher taxes over that same period.

At least 43 percent of ADM’s annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM’scorn sweetener operation costs consumers $10, and every $1 of profits earned by its ethanol operation costs taxpayers $30….

This study examines the dynamics of corporate welfare somewhat differently by investigating ADM as a classic case study of how those subsidies are obtained, how the welfare state encourages such “rent seeking,” and how such practices fundamentally corrupt the political life of a nation. Congress’s expressed desire to foster a free marketplace cannot betaken seriously until ADM’s corporate hand is removed from the federal till.

Key quotations centering on ethanol subsidies from Bovard’s take-down follow:

• … without the massive distortion of the tax code, there would be no ethanol industry, given the large cost differential in the production of ethanol and traditional gasoline.
• Ethanol subsidies reduce federal revenues by $770 million a year, losses that the Congressional Research Service estimates could rise to $1 billion by the year 2000.
• Many state governments also heavily subsidize the production or use of ethanol.
• Federal policy is not designed to simply “level the playing field,” or even to tilt the playing field in ethanol’s favor. Instead, the program amounts to nothing less than buying the entire playing field and giving the title directly to ethanol producers.
• Ethanol, as far as it is used for gasoline, is a political concoction–a product that exists and is used solely because of the interference of politicians with the workings of the marketplace.
• Ethanol producers must heavily bankroll politicians because their product would otherwise vanish overnight from the nation’s gas pumps.
• As early as 1979 the Washington Post reported, “The gasohol lobby says the $18.80 a barrel in available subsidies–compared with the $16 a barrel cost for foreign oil– is not enough.”
• The tax exemption or credit for ethanol production has consistently exceeded the entire value of the gasoline that ethanol displaces. The 54-cent-per-gallon tax deduction or credit is the equivalent of a subsidy of $23 per barrel of oil displaced at a time when oil costs only about$18 a barrel.
• In 1986 the U.S. Department of Agriculture estimated the average cost of producing ethanol at $l.60 a gallon, more than double the then wholesale gasoline price of 60 cents a gallon (the current wholesale price is roughly 55 cents).
• The ethanol debate is unlike the typical economic argument for an infant industry to which the government provides small subsidies or trade protection for a short period…. Instead, a perpetual,massive subsidy has been maintained in order to keep an existing industry from sinking under the weight of its own helpless uncompetitiveness.
• Each gallon of ethanol contains about two-thirds as much energy as does gasoline, resulting in reduced fuel economy. One would expect vehicles using gasohol to show about a 3.3 percent reduction in miles per gallon since ethanol constitutes 10 percent of the ethanol-gasoline blend.
• In a recent report on the performance of alcohol-gasoline blends, the DOE concluded that gasohol-fueled vehicles averaged 4.7 percent fewer miles per gallon than gasoline-fueled vehicles in automobile fleets.
• Using ethanol for vehicle fuel is hardly a new practice. In fact, ethanol has been used for fuel for more than 100 years. A USDA report noted, “The use of alcohol as an automobile fuel dates back to the first modern internal combustion engine, the Otto Cycle (1876), which used alcohol as well as gasoline. Henry Ford designed the Model T (1908) to use alcohol, gasoline, or any mixture of them.”

One could add many bullets with quotation after quotation from Bovard’s classic. Please refer to the original document for more.