How do you keep them down on the farm ... if all they make is a lousy few mil?

Fort Dodge, Iowa 

WHEN you're a reporter asking Iowans about ethanol, they tend to ask back, "First of all, where are you from?" If you reply that you're from New York, they chuckle and nod. After I told one Iowan in the ethanol business that I spent most of my preYankee life in Texas and Oklahoma, he said to me, "Okay, so at least you know that corn comes out of the ground and not off a supermarket shelf." This sums up how Iowans feel about New Yorkers and agriculture: Our knowledge begins and ends with Whole Foods.

But as I drive through Iowa and get a close-up view of corn production, I am reminded of the industrial landscapes of the Northeast. Here, nature is carved up into an endless grid. Towering above the farm plots are hulking metal giants--silos, grain elevators, industrial tractors. It's not so different from driving up the New Jersey Turnpike.

Government support for ethanol, a fuel additive made from fermented corn, has added another industrial feature to Iowa's increasingly mechanized countryside: the ethanol distillery. Ethanol promotion is just the latest chapter in a saga of government interference in the agricultural marketplace that began seven decades ago. Since the 1930s, farm subsidies have rewarded the heedless overproduction of just a few crops, yielded unmanageable surpluses year after year, and taken a heavy toll on the land. A tiny percentage of America's farm families now produce almost all of the country's agricultural output. The more these farmers produce, the more subsidies they receive. For this reason, they frequently spend their government payments on more land, more seed, and more equipment, churning out more food than they can profitably sell. Lawmakers, rather than solve this problem by reducing subsidies, have resorted to the alchemy of ethanol.

Their goal is to take a pile of corn that nobody wants and turn it into a source of revenue for American farmers. In states such as Iowa, that has had the effect of putting everything bad about farm subsidies on steroids: the gross inefficiencies, the environmental degradation, and, of course, the redistribution of billions of tax dollars to farm families whose incomes are well above the national average. By mandating the consumption of 7.5 billion gallons of ethanol per year by 2012, the Energy Policy Act of 2005 sent ethanol makers scrambling to increase production, which in turn sent corn prices--and consumers' grocery bills--soaring.

Goodwill toward farmers is one of the strongest forces perpetuating farm subsidies. Farmers descend from pioneers and represent important aspects of American culture and history. This perception is especially important to politicians; as long as it persists, they believe they can associate themselves with moral uprightness by voting for farm programs. They sell these programs to skeptical voters as a "safety net" for small, struggling farmers down on their luck. For many years, the public did not understand farm programs well enough to know that the benefits go primarily to large farming operations. But rising food costs, combined with reports of commercial farmers' netting record-breaking profits, are finally starting to change that.

COUNTRY CLUBBERS IN DIKE

Dennis Kruger operates an enormous farm in Iowa that produces corn and soybeans. Last year, Kruger Farms did $4.7 million worth of business and reported a net worth of $10.3 million. Kruger is also the president of Kruger Seed, a company he recently sold to the agribusiness giant Monsanto. In the 1990s, his family developed the Fox Ridge Country Club in Dike, Iowa, the city in which they live. They sold the golf course, but they still own the surrounding housing development and maintain an elegant residence overlooking one of the wide fairways. (It's a beautiful course, albeit the only one I've ever seen with a farm tractor sitting on the driving range.)

Considering Kruger's apparent financial health, one might be surprised to learn that he is among the top recipients of government aid in Iowa, according to the Environmental Working Group's farm-subsidy database. Between 1995 and 2005, he received $3.6 million in federal aid, including $730,000 in 2005 alone. Earlier this year, after the Bush administration proposed limiting the amount of subsidies a farmer could receive, Kruger complained to the Omaha World-Herald that such a limitation would hurt his ability to support his family and his seven fulltime employees, and argued that large farms shouldn't be penalized just for being large.

After visiting Dike, I drive north to check up on another recipient of federal aid. In Britt, I find a sea of bleachers overlooking a wide dirt oval and a vast expanse of corn. A sign hanging on a gate informs me that another season of racing events at the Hancock County Speedway ended just days ago, and that the Doug Studer Farms "Night of a Thousand Stars" was one of the season's last races. I later learn that, in addition to sponsoring races at the speedway, Studer Farms sponsors the Alan Mondus Racing team from Lakeville, Minn. According to the press release announcing his Mondus sponsorship, Studer is "a long time supporter . . . of racing."

So, I suppose, are American taxpayers; Studer Farms has received around $2.1 million in farm subsidies since 2000. It's not clear how much of that has gone to local racing events in Britt, but the exact number isn't important. The point is that the government is providing income support to people who can afford to build country clubs and sponsor racing teams.

The Studers and the Krugers are also cashing in on the spike in corn prices created by the 2005 ethanol mandate. They are among the 8 percent of family farming operations whose size makes them "commercial farms" according to the U.S. Department of

Agriculture. This small subclass reaps most of the benefits when the government subsidizes agriculture--as opposed to the 92 percent of farm-dwellers who derive either all or most of their income from sources other than farming or subsidies.

These smaller farmers are expected to see a slight increase in their average household income this year, to somewhere around $71,500. Commercial farmers, on the other hand, are expected to earn an average household income of over $200,000--an increase of 22 percent from what they made in 2006. The USDA, which calculated these estimates, reports that the windfall for commercial farmers is due in large part to "demand from the rapid expansion of ethanol production."

This is good news for farmers, but what about consumers? As millions of acres have shifted from producing food to producing fuel, food prices have gone up across the board. Ethanol is not the only culprit; rising standards of living in Asia and a weak U.S. dollar are increasing demand for U.S. beef and pork overseas, which also drives up their prices at home. But there is broad agreement that increased demand for ethanol has had an impact on food prices. It's simple economics: Although farmers have planted a lot of new corn, they haven't planted enough to replace all the corn they've sold to ethanol plants. That means there is less corn to feed cows and pigs at a time when worldwide demand for beef and pork is rising. Scarcity means higher prices.

Is ethanol at least driving down the price of oil? Republican presidential candidate Fred Thompson thinks so; he cited ethanol's potentially palliative effect on high oil prices to defend his Iowa-caucuses-inspired flip-flop on the issue. Confronted with his votes against ethanol subsidies in the Senate, Thompson told the Associated Press, "When I was in the Senate, I think oil was at $23 a barrel." This answer implied that, with oil above $80 a barrel, we need federal support for ethanol to get the price back down.

As it turns out, though, ethanol does not make gas cheaper, but high oil prices do make ethanol more expensive. Petroleum is a major input in the manufacture of ethanol--it is required not just to make ethanol, but to transport it to points of sale (since ethanol is corrosive to pipes, and must be moved by truck). In fact, there's good evidence that making ethanol requires more petroleum than making gasoline does. So if high oil prices should make us want to use less oil, we should be diminishing our ethanol consumption right now, not boosting it.

This inconvenient truth also means that ethanol won't do much to reduce CO2 emissions. It will, however, disrupt water supplies-and a just-released report from the National Research Council finds that this is already happening in some regions, for two reasons. First, farmers are planting new corn on formerly uncultivated land--which means an increase in the total acreage that must be irrigated. Second, farmers are planting corn on acres that formerly grew other, less water-intensive crops. To put the size of this shift into perspective, consider that we now have more corn growing on American soil than at any time since World War II, when the farms of Europe had been devastated by war and America was feeding two continents. The result is not just a depletion of water resources, but more erosion and runoff into streams and rivers. Fertilizer content in this runoff has led to rampant algae growth in some river deltas, and this has decreased the water's oxygen content so drastically that no other organisms can survive.

THE NATIONAL-SECURITY ARGUMENT

Thompson made another argument that bears mentioning because it is as old as the ethanol debate itself: Federal assistance for ethanol, he said, is "a matter now of national security." Energy independence from the Middle East was the rallying cry for ethanol in 1974, when Congress first started promoting it as a response to the oil embargo. But the argument is as spurious today as it was back then.

First, even the biggest of proposed ethanol supports--an increase in mandated ethanol consumption from 7.5 billion to 15 billion gallons per year, as called for in the energy bill Congress is currently debating--would barely dent America's gasoline consumption, which is approximately 150 billion gallons annually. Two-thirds of our oil is imported, meaning that to achieve true energy independence ethanol would have to replace 100 billion gallons of gas. That's just not going to happen.

Second, only around 5 million automobiles in America are "flexible-fuel vehicles"--cars that are equipped to run on a blend of 85 percent ethanol and 15 percent gasoline (known as E85). That's out of 135 million registered passenger cars in the United States. Also, owing to a scarcity of service stations that sell E85, most people who drive flex-fuel cars fill them up with regular gas. Simply mandating the consumption of more ethanol at the refinery level won't change these structural impediments to its adoption as an alternative to gasoline.

None of this is to deny that there is a legitimate market for ethanol. All gasoline must contain additives known as "oxygenates," and ethanol is one of them. Gasoline blenders have turned increasingly to it since MBTE--another additive--was found to contaminate groundwater. Most cars can run on blends of up to 10 percent ethanol and 90 percent gasoline. Offering consumers this "gasohol" choice lets them voluntarily support agriculture while using less gas. Gasohol is available all over Iowa, and it fuels most of my travels around the state.

But the momentum behind federal support for ethanol militates toward the production of far more than the market can absorb. Recent news reports confirm that, in a rush to expand production, the industry built too much capacity in the wake of the 2005 mandate. Even before the mandate, ethanol support took on a dizzying array of forms. There are tax credits for refineries that buy ethanol; tariffs to block the importation of cheap, sugar-based ethanol from Brazil; loan guarantees for investors in ethanol plants; and, in some states, direct payments to ethanol producers. But the piece de resistance in this banquet of corporate welfare is the mandate. Amazingly, President Bush and much of Congress support doubling it.

WAY TOO MUCH

The general manager of an ethanol distillery I tour in northern Iowa--a friendly and intelligent man with a broad knowledge of the industry--says of the phased-in consumption levels set by the 2005 mandate: "We are ahead of that curve already." Industry-wide, he says, distilleries are producing more ethanol than Congress has ordered refineries to buy, and he confirms that "the anticipation [of the mandate] rather than the [mandate] itself" is what led to the building of so much capacity.

Ethanol makers may be producing above the mandated levels, but refineries aren't buying more than the law requires. This has led to cooling demand. After my visit to his distillery, I speak a second time to the general manager in Iowa. He says: "Is there a foundation to the rumors that demand is slowing down? Yes, there is." He mentions several plants that have either suspended construction or "laid off their folks and closed their doors."

For this reason, the ethanol lobby is growing ever more frantic in its demands that Congress increase the mandate and force refineries to use their surplus production. But among producers "there's a much greater degree of caution," says the general manager. "There's a lack of confidence" in Congress's ability to pass a higher mandate in time to alleviate the industry's immediate problems.

The biggest of those is of course the surplus--a failure not of hardworking people like the general manager, whose small distillery predates the ethanol boom, but of the federal policies that overheated the industry. It's a failure whose roots go back to the "temporary" Depression-era farm-subsidy program. Far from helping impoverished farmers, it has become a welfare system for mega-farms that expand and overproduce year after year, purely to receive more subsidies. In corn's case, federal support for ethanol was supposed to make the problem go away. Instead, Congress stands ready to bail out the industry again. If it does, we can expect ethanol surpluses for a long time.