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May 5, 2011

Ethanol

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Mr. GRASSLEY. Mr. President, it is not going to surprise any of my colleagues or the public at large that a lot of times I come to the Senate floor to speak about agriculture and to speak about ethanol. What brings me to the floor today is the ongoing crusade by the Wall Street Journal, in an intellectually dishonest way, to put out a lot of facts about ethanol that are not true.

The latest barrage comes from an interview published last Saturday in the Wall Street Journal with C. Larry Pope, CEO of Smithfield Foods. In this article, there are a lot of misstatements about ethanol and about ethanol causing the price of food to rise dramatically. I take the floor now to rebut some of those misstatements and also to set the record straight so that when a very fine CEO such as Mr. Pope, even though I disagree with him on this article--he is a decent person, and he is a good corporate executive--the next time, he will not speak. But I can also say I do not like to have confrontations with Smithfield Foods because they do provide a lot of good-paying jobs in the Middle West, and they do a good job of adding value to agriculture.

There has been a tradition at Smithfield to kind of not appreciate American agriculture. It goes back to some conversations I had with the previous CEO by the name of Joe Luter. I remember Joe Luter coming to my office to try to explain to me some things he thought I had misinterpreted of what he was really talking about regarding the family farmer and about the production of hogs and whether he was wanting to put the family farmer out of business.

I remember just as if it was said to me yesterday a statement he made when I said: You are running the family farmer, the family producer, the independent producer out of the hog business, and you want to control everything. He said to me something along the lines: I do not want to put your farmers out of business; I just want them feeding my pigs. He was basically saying he wanted the family farmer to be an employee of Smithfield and not be an independent producer.

Another point he tried to argue with me--and I am referring to Mr. Pope's predecessor, Mr. Luter--he also argued that Iowa farmers in a sense were not smart enough to run a packing plant. In fact, he offered to give a plant to a group of farmers and guaranteed it would be out of business within 6 months.

I do not know whether I have fault with Mr. Pope as CEO of Smithfield and ethanol in this case as opposed to Mr. Luter, his predecessor, and who is going to raise pigs, but there may be an institutional bias within the corporation of Smithfield.

Anyway, with that as background, I want to go to this article I pointed out that was in the Wall Street Journal. The article says: ``It is Getting Hard to Bring Home the Bacon.'' Basically, what the paper is saying in that headline is that because so much corn is used for ethanol, we are raising the price of corn and that is driving up the price of food.

Well, I am on the floor to say that is a bunch of hogwash. This article was in the April 30 edition of the Wall Street Journal, so if people want to read it and check it against what I have to say, I am happy to provide that information. The article was based on an interview with C. Larry Pope, CEO of Smithfield Foods, the largest pork producer and the largest pork processor.

The opinion piece was intended to share Mr. Pope's view on rising food prices and also on the price of pork. Mr. Pope puts much of the blame on the Federal ethanol program. But I wish to address a number of the claims made by Mr. Pope, and claims made in the opinion piece presumably based on statements by Mr. Pope.

Mr. Pope claims, and I quote:

Now, 40 percent of the corn crop is directed to ethanol, which equals the amount that is going into livestock food.

Right there, statistically, he is wrong. Let me point out how he is wrong. In 2010, 4.65 billion bushels of corn were used to produce 13 billion gallons of ethanol. But ethanol production uses only the starch from a corn kernel. So I want to hold up a bag of corn kernels. It would be better if I brought in an ear of corn, but this is the best way to transport it. These are corn kernels.

When ethanol uses only the starch from the corn kernel, the result is that more than one-third, or 1.4 billion bushels of corn--and it is called dried distiller's grain, and this is what dried distiller's grain is--was available as a high-value livestock feed. In fact, what is left over after you produce ethanol is of much more value than if you would take the original corn kernels and use that by itself for animal feed.

Let's go back to that quote.

Now, 40 percent of the corn crop is directed to ethanol, which equals the amount that is going into livestock food.

Well, on a net basis now, ethanol production used only 23 percent of the U.S. corn crop--far less than the 40 percent that ethanol detractors claim. So once again, you have a bushel of corn--56 pounds. Out of that 56 pounds of corn, you get 2.8 gallons of ethanol. When you get done making the ethanol, you have 18 pounds of dried distiller's grain that is left over. Anybody who isn't ignorant about ethanol understands there is still an animal feed product left over. So you can't say you are making ethanol out of corn and using it all for ethanol and nothing for food, because this is a very efficient process.

By the way, let me say this. You can tell about the ignorance over ethanol in this town because a lot of people pronounce it E-E-E-T-H-A-N-O-L. It is ethanol. But people who are ignorant about it don't even know how to pronounce it. I don't know whether Mr. Pope pronounced it right or not.

According to the USDA, feed use consumes 37 percent of the U.S. corn supply, much more than the 23 percent consumed by ethanol production. So I hope Mr. Pope will put that in his pipe and smoke it, because he is wrong on that point. Ethanol is not diverting corn away from feed use.

Next, Mr. Pope claims:

Ethanol policy has impacted the world price of corn.

I am glad Mr. Pope raised that issue. He clearly has no idea how little an impact ethanol has on the global grain market. In fact, U.S. ethanol use represents a mere 3 percent of the world's supply of coarse grain. In addition, the global grain supply in 2010 to 2011 is 11 percent larger than the 2000 to 2001 supply.

U.S. farmers happen to be the most productive in the world. Since 1975, American farmers have doubled U.S. corn production from under 6 billion bushels to over 12 billion bushels last year, and they have done it using essentially the same number of acres. Corn farmers today grow five times as much corn as they did in 1930 on 20 percent less land.

So for all those people out there who think there isn't enough productivity in the American farmer or in our land or in the efficiency of producing, I hope you understand that we are producing five times more corn than we did in 1930 but doing it on 20 percent less land. Let me explain it another way. In 1910, you know what powered agriculture? Horses and mules. And in that day, it took 90 million acres of land to grow the food to keep the animals that powered agriculture alive and productive. That 90 million acres is equal almost to the 92 million acres that will be planted to corn in the United States this year.

Farmers are continuing to meet the growing demand of ethanol, livestock feed, and exports. So I hope that Mr. Pope will put that in his pipe and smoke it, because he needs to understand how productive the American grain farmer is.

The author of the opinion piece then makes a claim that has absolutely no basis in fact, so I guess I can't attribute this to Mr. Pope. The article states:

The EPA has found ethanol production has a neutral to negative impact on the environment.

I have always said that ethanol is good for the environment, but here we have the EPA being quoted stating it has a neutral to negative impact on the environment. The fact is, under the renewable fuels standard created in 2007, corn ethanol was required to reduce greenhouse gas emissions compared to gasoline by at least 20 percent. Corn ethanol has exceeded that threshold. In other words, the law says such and such, and ethanol exceeds what the law even requires.

A reduction of more than 20 percent compared to gasoline is not neutral. So the EPA has found ethanol production has neutral to negative impact on the environment. Not so. If you remove EPA's use of murky science surrounding emissions from what is called indirect land use--and that is kind of complicated, so I won't go into that--ethanol reduces greenhouse gas emissions by 48 percent compared to gasoline.

I have heard Senators in the last 2 months on the floor of the Senate telling all of us that ethanol was bad for the environment, but a recent peer-reviewed study published in the Yale Journal of Industrial Ecology--all those Ivy League people in the Senate ought to have some allegiance to anything done by Yale University--says that ethanol reduces greenhouse gas emissions by up to 59 percent compared to gasoline.

Mr. Pope also asserts that Pilgrim's Pride went bankrupt because of ethanol. Pilgrim's Pride was a food processor. He stated:

The largest chicken processor in the United States, Pilgrim's Pride, filed for bankruptcy. They couldn't raise prices, so their cost of production went up dramatically.

Again, facts are stubborn things. On December 1, 2008, analysts cited the primary cause of bankruptcy was their large debt load, the result of the acquisition of a $1.3 billion rival they purchased in 2007. Other factors included low chicken demand and prices resulting from the recession and poor commodity hedging. But it had nothing to do with the price of ethanol and corn prices being high. So I hope Mr. Pope will put that in his pipe and smoke it.

Another statement by Mr. Pope seems to place all the blame on corn farmers for rising food prices. He said:

You eat eggs, you drink milk, you get a loaf of bread, and you get a pound of meat. All of those are based on grains.

That last part of the statement is accurate. But let me tell you what is wrong with the relationship between rising food prices and the price of grain. Let us look at the U.S. Department of Agriculture. The farm value of every food dollar is 19 cents. In other words, if you spend $1 on food at the supermarket, only 19 cents of that goes into the pocket of the farmer. Of that 19 cents, the corn value of that farmer's income is 3 cents.

So let us look at some of these prices. You buy a box of corn flakes--12.9 ounces. Only 5.6 cents goes to a farmer if the corn is $4 a bushel. If corn is $6 a bushel, the farmer gets 8.6 cents out of a whole package of corn flakes.

Soft drinks: $4 a bushel, the farmer gets 6.6 cents. If it is $6 a bushel, he gets 10 cents.

Beef: The farmer gets 18.2 cents at the low end of corn prices, and 27.8 cents at the higher end.

I could go on with pork and chicken and turkey and eggs and milk. But the

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point is, don't blame the farmer when you buy a box of corn flakes because the farmer gets a little over a nickel, or at most, if corn is higher priced, 8.6 cents. So the farmer gets 19 cents in a global way. Corn only accounts for 3 cents out of $1 of food that you buy. The other 81 cents of that $1 goes to labor, goes to energy, goes to transportation, goes to marketing, and goes to packaging.

The World Bank, in 2008, stated that biofuels were a large contributor to rising food prices. And you know what, 2 years later, in 2010, they released a more thorough analysis that essentially dismissed that idea. So I want to quote from the World Bank report.

..... the effect of biofuels on food prices has not been as large as originally thought. ..... the use of commodities by financial investors may have been partly responsible for the 2007-2008 spike.

So, for Mr. Pope, I hope he puts that in his pipe and smokes it because he is wrong about the amount of corn and the price of corn and the impact on food prices, and the World Bank dismisses that as well. We even have the United Kingdom--I like to say Great Britain instead of United Kingdom--their Department for Environment, Food and Rural Affairs concluded in 2010 that ``available evidence suggests that biofuels had a relatively small contribution to the 2008 spike in agricultural commodity prices.''

In 2009, the Congressional Budget Office evaluated the increasing demand for corn to produce ethanol on food prices. Maybe I better start with the 5.1-percent increase in food prices for the year 2009. Of that 5.1 percent, just one-half of 1 percent, between that and eight-tenths of 1 percent--I better say it more accurately. We have a 5.1-percent increase in food prices. Only one-half percent, maybe up to .8 percent of that 5.1 percent was due to the demand for ethanol, and about 10 percent of just the increased price of food was because of ethanol.

In 2007, Informa Economics concluded that ``it is statistically unsupported to suggest that high and/or rising corn prices are the causative reason behind high and rising retail meat, egg and milk prices.''

Another point raised in this article by Mr. Pope needs to be addressed. He said, ``Over the last several years, the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel.'' While true, this all needs to be put in context. Over that same period of time, crude oil prices went from $50 a barrel to nearly $150 a barrel. Today, it is over $110 a barrel. Gold prices went from $500 an ounce to $1,500 an ounce today.

Mr. Pope would rather pay $2.40 a bushel for corn rather than $7.40. I understand that. But does he know what impact that would have on agriculture? If corn were only $2.40 a bushel, every farmer today would be out of business because the cost of production is around $4 a bushel.

I can see he wants the farmers to subsidize Smithfield if he wants to continue getting corn for $2.40 a bushel, but a farmer cannot subsidize the big corporations. Perhaps Mr. Pope would rather have us support government subsidies so long as they would allow him to buy corn below the cost of production.

I can tell you this: A lot of people say ethanol is the reason corn prices are high. It might be part of the reason. But let's suppose you didn't have any ethanol and you had $2.40 a bushel for corn. You know darn well that a lot more would be coming out of the Treasury to make sure the safety net for the family farmer was working than we give for an ethanol subsidy.

Regardless, at $7.40 a bushel, the corn costs in a gallon of milk is about 46 cents; the cost of corn in a pound of chicken is about 34 cents; 1 pound of beef takes about 92 cents worth of corn; and relative to Smithfield because they are big in pork, 1 pound of pork requires about 39 cents of corn. So if that $4.54-a-pound for bacon in the grocery aisle contains only 39 cents worth of corn, perhaps Mr. Pope should explain to all of us--and, most important, to the people who buy it, the consumer--where the other $4.15 or 91 percent of the retail cost is going.

In addition, after the steep rise in commodities in 2008, prices of corn and other commodities retreated very significantly. I don't recall seeing from people like Smithfield, that when corn was $7 3 years ago and it went down to $3.58--I didn't see a very dramatic drop in prices at the grocery store after the corn prices dropped, which leads me, as I have so often said on the floor of the Senate, that these food processors need to scapegoat something to increase the price of their product to the retailer and the consumer. Then when the price goes down, they have increased their price but the price doesn't go down accordingly.

Mr. Pope claims rising corn prices are hurting his business. He said, ``Rising prices are already squeezing food producers 2 to 3 percent earnings margins.'' That is his quote. The statement is rather surprising given the contradictory earnings report for Smithfield Foods that came out March 10, 2011. Smithfield reported net income for the quarter of $202 million, an increase of $165 million over the same quarter in 2010. Mr. Pope stated at the time of the earnings report: ``We are extremely pleased with the record performance of our company in the third quarter. Year to date, our earnings have surpassed that of our record year.''

The reality of Smithfield's record profits fails to validate the rhetoric. According to the article--and here I am quoting the article and not Mr. Pope:

Smithfield's economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn't subsidized.

I guess if it is Smithfield's economists, it must be coming directly from the company, then. Smithfield may want to invest, then, in better economists.

According to an April 2011 study issued by the Center for Agricultural and Rural Development at Iowa State University, only 14 cents or 8 percent of the increase in corn prices from 2006 to 2009 was due to ethanol subsidies. The study also found that without the ethanol subsidy, corn prices would have averaged only 4 percent less over the same period of time.

Finally, the article calls into question the value of ethanol to our Nation's energy supply. It states:

The ethanol industry would supply only 4 percent of the nation's annual energy needs even if it used 100 percent of the corn crop.

This is a straw man. No one is arguing that ethanol will replace our Nation's entire energy needs. Using just 23 percent of the corn crop, we are displacing nearly 10 percent of our Nation's foreign oil dependence. Domestic ethanol production ranks behind only the United States and Canadian oil production in terms of domestic transportation fuel supply.

It is obvious that Saturday's opinion piece in the Wall Street Journal was just another coordinated effort to undermine and scapegoat homegrown ethanol and America's corn farmers to help deflect criticism from big food producers. Make no mistake, Smithfield's CEO, Larry Pope, is concerned with only one thing--Smithfield's bottom line.

While companies such as Smithfield perpetuate a smear campaign to boost their profits, American farmers and alternative-fuel producers are working hard to produce a reliable and safe supply of food, fiber, and feed for the Nation and the world.

That is the end of my reaction to what he, Mr. Pope, said, but I would like to end by saying that the marketplace will take care of this. You know, 30 years ago when we started an ethanol program, we produced about 100 bushels of corn to the acre on average. Today, nationally, I think it is about 155 bushels of corn to the acre. In Iowa, I think it is about 168; the year before, it was 182.

People who are experts in genetics can say we will be able to double the production of corn over the next 50 years. That is one way we can solve this problem. The other way is that there is a massive amount of land in a lot of places on this Earth, and a great part of it is in West Africa, South Africa, and parts of East Africa, where, if people would establish law guaranteeing property rights, title to land, there would not be governmental disincentives to growing food, there would not be a cheap food policy--there would be a massive production of foodstuff in this world.

In the United States, we are going to continue to produce more. There are going to be 4 million more acres of corn grown this year than last year.

There are even some odd things being done because the price of corn is $7.

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From the Des Moines Register, this headline, from a northern small community of Iowa: At the Whittemore Golf Club, the golf course is going to be plowed up and planted with corn. There are some extreme measures that will be taken here to respond to the demand for food or fiber or fuel.

Just remember, agriculture in America has the capability--the demonstrated capability to produce it all. We don't grow crops just for food. We have always grown for food and fiber, and for the last 30 years, food, fiber, and fuel. We can continue to do it, and we are going to do it successfully, and the consumers of America are not going to pay for it. In fact, if we do not continue to do that and keep the family farmer of the United States healthy and strong--and ethanol is a contribution to that--then we are not going to be able to meet the needs of our society.

I yield the floor.

(Senate - May 4, 2011)

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