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Ethanol and the Presidential Election

The farmer and the cowman won't be friends.

12:00 AM, Sep 26, 2008 • By DAVE JUDAY
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Jay Cost of the "HorseRaceBlog" on RealClearPolitics.com delved into an area where few mainstream political commentators tread--farm state politics. His post was entitled: " Does McCain Have a Rural Problem? "

Earlier in the campaign, somewhat famously, Barrack Obama commented about embittered rural citizens "clinging to religion and guns." That comment is his rural problem. And he has it in West Virginia, Virginia, Kentucky, and parts of Pennsylvania. McCain's problem, as posited insightfully by Cost who has a real grasp on the economies and politics of these corn-belt states, is Indiana, Iowa, and Nebraska. And it all comes down to this: ethanol. Cost wrote, in part:

What tipped me off to the possibility is McCain's poll position in Indiana. McCain retains a lead in the RCP average, but it is much less than what George W. Bush pulled in 2004. Indiana is a major producer of ethanol - number 5 in the nation, capable of producing 1.2 billion gallons of ethanol per year. Indiana also ranks number 5 in corn production, generating 760 million bushels per year. Corn producers love ethanol because it's another use for their crop, which means corn prices go up. Could this be why McCain is doing poorly relative to George W. Bush's performance in 2004? It might be. Granted, only a small slice of Indiana's workforce is classified as agricultural. Like western Ohio, Indiana's workers are much more focused on manufacturing and tech than agriculture - despite the vast acres dedicated to farming. However, corn production is still a crucial aspect of the state's economy - especially in the productive farmland along Interstate 65 between Indianapolis and...Chicago! I'd note that McCain is also doing poorly in Iowa, number one with a bullet in both corn and ethanol production. He's also had problems in Minnesota, number four in ethanol and corn.

Cost went on to discuss Nebraska where McCain is getting pummeled on ethanol, chiefly by surrogate Obama spokesman Sen. Ben Nelson. Indeed, Cost points out that McCain only has to win one more vote in Indiana and Nebraska--not run away with it via a 20 percent-or-larger-margin as Bush did in 2004. Cost concludes: "I don't know if the McCain campaign needs to engage Obama in Indiana. Nevertheless, it is fair to suggest that it consider tightening its message to farmers. A quick Google search betrays McCain's soft underbelly on this front."

Nebraska is an interesting case--as pointed out recently by former agriculture secretary and now Nebraska Senate candidate Mike Johanns, the winner of the presidential race in the state gets 2 of the 5 electoral votes. The other three are awarded on the basis of the winner in each of the three congressional districts. That is why the Obama campaign has 15 people on the ground in the Omaha field office--despite the fact that all 5 of the Cornhusker State's electoral votes have gone to a Republican candidate in every election since 1964. If Obama can win one district in Nebraska, it could give him one electoral vote, and if the race is that close it could matter.

Ethanol is not a new issue for McCain--you think by now he'd have a strategy. After all, it is plausible to argue that he was not elected president in 2000 because of ethanol--long before it was such a prominent national issue. He skipped the Iowa caucuses back then because of his stances on ethanol, and despite some catching up in other states (famously Michigan) he never got over the slow start.

So how would McCain tighten his message? To begin with he could engage in Nebraska and begin to counterpunch. Since 2000, ethanol has matured as an issue. It is now an issue with two sides within agriculture. Livestock producers are paying the price of higher valued corn; and when (or if) cellulosic ethanol ever comes on line, alfalfa hay and pasture land will become more scarce and costly.

McCain's position on ethanol, i.e. letting the market take over, eliminating the mandate and tax credits for using the stuff, is not that different than the position of the Nebraska Cattlemen's Association, which is this:

because the availability of affordable, high quality feedstuffs is crucial to the profitability of the beef industry; and because the beef industry is competing with the ethanol industry for corn, that Nebraska Cattlemen supports a transition to a market based approach for the usage and production of ethanol.

Further, the Nebraska Cattlemen are "opposed to any additional federal or state mandates for ethanol usage and/or production." That anti-mandate position was adopted in December 2006--before Bush proposed and Congress adopted a mandate that ethanol and biofuels grow from the prescribed 7 billion gallons of use to 36 billion gallons of use. The Nebraska Cattlemen still oppose that mandate, and any more to come. Yet Obama is calling for ethanol mandates to be expanded from the current 36 billion gallons to 60 billion gallons.

The National Turkey Federation comes from the same perspective as the Nebraska Cattlemen--that ethanol raises feed costs to turkey producers. And guess what? Nebraska's only turkey plant just announced it is now shutting down because it is losing too much money.

Indiana Pork Producers have been, and remain, anxious about ethanol policy for all the same reasons. One industry spokesman there recently referred to the pork industry as corn's long time "wife" having to put up with the flaunted new "mistress" of ethanol. In short, if the McCain campaign is serious about tightening the message, there is plenty to work with. At least as much as Obama has to work with in trying to tell Nebraska cattlemen and Indiana pork producers who were getting anxious over a 7 billion gallon ethanol mandate in 2006, that if elected in 2008 he'll push for 60 billion gallons of mandated biofuel use.

Both the National Pork Producers Council and the National Cattlemen's Beef Association (NCBA) went out of their way for the Bush campaign in 2004. NCBA broke tradition--and lost members for doing so--in endorsing Bush, then felt totally shunted aside when Bush pushed a 35 billion gallon mandate in his first State of the Union after the election (when Congress passed the mandate they added 1 billion gallons to Bush's proposal to make the total 36 billion gallons).

Whether the McCain campaign will tap into that sentiment of resentment among livestock producers, or whether Obama can make gains in the Corn Belt proposing more support for ethanol remains to be seen. My guess is that McCain has the political tide turning his way. But this is a real issue, in a real close race. Indeed a race that is perhaps closer than in 2004 when Bush and Kerry were campaigning in the last two weeks of the race on a much smaller farm issue than biofuels--i.e. the extension of the $200 million Milk Income Loss Contract (MILC) payment for dairy farmers in Minnesota and Wisconsin.

McCain should at least--via surrogates like the Obama campaign has used Nelson and others--push back with a litany of the unintended consequences of ethanol, from input costs to livestock farmers, to food inflation, to overloaded rural infrastructure, while livestock producers, food consumers, and rural voters are experiencing them.

Dave Juday is a commodity market analyst.