Limits to ethanol’s wild success exist

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When biofuel promoters begin to extol the virtues of ethanol, it’s sometimes difficult to determine if their excitement is powered by corn-based fuel or corn-based liquor.
Please don’t misunderstand. Ethanol’s 25-year childhood is over; it’s on a rocket ride no alternative energy source has ever experienced in America.
And, yet, caution signs – some close, others years away – are coming into focus.
Farmers, farmer-investors and community leaders in pursuit of new markets, value-added profit and local jobs need to consider these signs because, ethanol, like its cousin ethyl, might deliver a head-splitting hangover.
Imports. The first is ethanol imports. President Bush, an oil patch flower, endorses waiving the 54-cents per gallon tariff on imported ethanol to ease regional tight stocks.
The Congressional farm bloc, led by Iowa Republican Sen. Charles Grassley, however, hopefully bolted that backdoor in an over-my-dead-body letter to the President May 12.
But that swift slamming, as Grassley noted in his White House missive, does nothing to stop duty-free ethanol imports allowed under the Caribbean Basin Initiative.
That law permits 7 percent of all U.S. ethanol consumption to be imported tariff-free every year.
The sliding scale means an estimated 315 million gallons of non-tariff, foreign ethanol can land here this year; 476 million gallons next year.
Raw input. A second concern, highlighted in the USDA’s May 12 Supply and Demand Report, is a most pleasant problem: corn supplies flowing into ethanol production.
In the report, USDA shows corn used in ethanol production rising from 1.32 billion bushels in 2004-2005 to 1.6 billion bushels this year to 2.2 billion bushels next year.
That near-doubling, along with this year’s estimated 3 million acre cut in plantings, will add 20 to 40 cents per bushel to corn prices, USDA guesses.
Economic miss. At some point, though, ethanol economics run into trouble.
Daniel G. De La Torre Ugarte, a research associate in the University of Tennessee’s ag policy shop, calculates that threshold at about 7.5 billion gallons of annual production, or about 1 billion gallons over 2006′s anticipated 6.5 billion production.
“The market will continue to expand,” notes De La Torre Ugarte, “but corn cannot provide all the nation’s ethanol. Beyond that, higher prices begin to become self-defeating.”
Coincidentally, 7.5 billion gallons is the 2012 Renewable Fuel Standard established in last year’s Energy Bill.
At today’s rate of biofuel plant expansion, that mark will be hit long before 2012.
End product. Purdue ag economists Chris Hurt and Otto Doering are beginning to get itchy about corn-based ethanol, also.
It will take 2.5 billion bushels of corn to make 7.5 billion gallons of ethanol.
That demand will cut into soybean and wheat production, they foresee, as well as increase feed prices for livestock producers.
Additionally, more ethanol means more ethanol byproduct, chiefly distillers dried grain, or DDG, notes Hurt. While DDG is an excellent protein substitute in cattle and sheep feed, what it substitutes for – soybean meal – will rattle the soybean processing industry.
DDGs will “have the largest impact on the animal feed industry of any event since the advent of soybean meal in the 1940s,” Hurt says.
In short, ethanol production is a greyhound, soybean processing a mutt.
Losing ground. Hurt and Doering also see local elevators losing ground as more local corn is used by local ethanol plants.
“Some of today’s grain elevators will probably go out of business,” they note.
These changes have not escaped the notice of the Global Grain Gang.
Cargill, a 120-million-gallon annual producer, wants import duties dropped. And, yes, Cargill has off-shore ethanol plants.
Archer Daniels Midland, however, opposes the tariff waiver – largely because it’s adding 500 million gallons of new U.S. ethanol production. When online in 2008, ADM will make 1.6 billion gallons, by far the industry leader.
In fact, ADM’s new boss, Patricia Woertz – the firm’s first non-Andreas since the 1960s – is the former executive vice president of oil giant Chevron.
It, like Purdue, sees ethanol ascendant, soybeans descendant. And maybe so should you.
Ethanol’s fast dance will continue. Plan for it or even join in.
Remember, though; limit your trips to the punchbowl because it’s not called punch for nothing.

About the Author

Alan Guebert was raised on an 800-acre, 100-cow southern Illinois dairy farm. After graduation from the University of Illinois in 1980, he served as a writer and editor at Professional Farmers of America, Successful Farming magazine and Farm Journal magazine. His syndicated agricultural column, The Farm and Food File, began in June, 1993, and now appears weekly in more than 70 publications throughout the U.S. and Canada. He and spouse Catherine, a social worker, have two adult children. farmandfoodfile.com More Stories by Alan Guebert

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