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Ethanol production has leveled off the last couple of years as we approach the 15 billion gallon RFS blending ceiling, and as the blend wall kicks in. In fact, ethanol production is projected to decline slightly next year due to the high cost of corn and reduced driving due to the Obama Depression. The timing is important: the price of corn is spiking as the ethanol demand has stabilized. The two do not correlate.

That will not stop the anti-ethanol crowd from claiming a cause and effect relationship. This is shaping up as a replay of the 2007-2008 food vs. fuel furor, when ethanol was again blamed for all the woes of the world. Sober analysis eventually exposed the game, but not until the public tone was set. At that time, in fact, all commodities (not to mention U.S. housing prices) were spiking, led by oil. Corn was not the leader; in fact, it trailed many other food commodities, as well as industrial commodities and oil, in its percentage increase. The commodities bubble burst, of course, as the world slid into recession, and corn prices receded along with other agricultural commodities. I'm sure you noticed your grocery store bills plummeting as well. (That's a joke, folks.)

Coupla points:

(1) In recent decades, the farmgate price of commodities has accounted for less than 20% of consumers' costs at the grocery store. Whether the figure is a bit higher or lower now, I don't know, but that's the ballpark. The biggest single factor in consumer food costs is labor, followed by energy.

I don't begrudge grocery store employees what they make. It's a competitive industry, I have plenty of choices about where to shop, and I'm grateful to the grocery industry for making an incredible array of global foods available to me 24/7, in all seasons. Incredible, when you think about it, and I happily pay for it. But I recognize that has more to do with what I pay in the checkout line than the price of corn.

(2) The U.S. has built out the ethanol industry with increased production. During the boom years of the ethanol buildout in the last decade, we were simultaneously setting export records for corn. U.S. yields took a hit this year due to floods in the spring and drought this summer, but the long term trend is still up, due to better genetics and precision farming.

(3) Yes, a lot of U.S. corn now goes for ethanol. But you can't look at this and say "that corn is being diverted from food and fuel," as if corn production were a zero sum game. That is corn that would never have been planted absent ethanol demand, and it is produced with technologies that would never have been developed or deployed absent ethanol demand. This is a classic demand-pull story, and it has generated a one-third increase in U.S. production since 1990 (down a bit this year due to weather). U.S. yields are expected to continue to increase for the forseeable future, and as GMO's gain international acceptance, foreign yields will increase dramatically as well.

(4) To reprise: U.S. ethanol demand is stabilizing. The big new factor today is the emergence of China as a net corn importer. (China is the world's #2 corn producer and had been exporting corn until last year.) The global middle class is growing rapidly, and world food demand is expected to double by 2050.

(5) Food is probably going to get more expensive whatever we do. By any historical measure, food prices in the U.S. and the developed world generally have beeen extraordinarily low since WWII. As the rest of the world develops, food may be revalued. Since the U.S. is the world's agricultural leader, this actually works to our advantage in the long run. From a humanitarian standpoint, the poorest people in the world are subsistence farmers in developing countries, and anything that raises returns to agriculture is beneficial to them. If relatively wealthier urban consumers pay moderately more for food, so be it. I am not a farmer, by the way, but if the next turn of the wheel benefits farmers vis-a-vis urbanites, I'm ok with it.

(6) The next Farm Bill should reflect these new realities. This is the time to drive a stake through the heart of farm subsidies -- i.e., shift to an insurance based safety net -- and return farmers to producing for real markets, not for government programs.