Corn-Based Ethanol--Though a Hoax--Is the Current Rage in Congress

FarmPolicy.com | January 17, 2007
Keith Good

"Every Member of Congress now has Discovered Ethanol"

  I. Ethanol-Renewable Fuels A. Politics and Economics

Brendan Murray and Tina Seeley of Bloomberg news, reported yesterday that, "Administration officials say Bush's seventh annual address to Congress on Jan. 23 will reiterate his vow to cut Middle Eastern oil imports by 75 percent by 2025 and curb what he describes as a national 'addiction' to fossil fuels. Democrats and the White House are likely to agree to boost support for biofuels, increase federal funding for electric-powered vehicles and sweeten incentives for the use of solar and wind power, lobbyists and industry experts say."

The article added that, "At the same time, a bipartisan group of senators --including Tom Harkin, a Democrat from corn-producing Iowa, Richard Lugar, an Indiana Republican, and Barack Obama, an Illinois Democrat -- introduced legislation earlier this month to give tax credits for cars that can run on fuel that is mostly ethanol.

"'Every member of Congress now has discovered ethanol,'' Representative Collin Peterson, a Minnesota Democrat who heads the House Agriculture Committee, said in an interview. By mentioning biofuels such as switchgrass in his 2006 State of the Union address, Bush 'really started people thinking,' says Peterson, 62."

The Bloomberg writers also noted that, "Mark McMinimy, an analyst with Stanford Group in Washington, said in a note to his clients last week that 'it is becoming increasingly apparent that the renewable fuels/ethanol juggernaut enjoys one of the most prized commodities in Washington: broad- based, bipartisan political momentum.'"

Associated Press writer Chris Baltimore reported yesterday that, "U.S. President George W. Bush's annual speech to Congress next week is likely to call for a massive increase in how much fuel ethanol that U.S. refiners must mix with gasoline in coming years, sources familiar with White House plans said on Tuesday.

"Energy legislation signed into law last year would require refiners to use at least 7.5 billion gallons of renewable fuels annually by 2012.

"One source briefed by White House officials said Bush's speech on January 23 could call for even more ethanol usage -- over 60 billion gallons by 2030.

"'I think it's going to be a big number,' the source said on condition of anonymity. 'It's in the ballpark of even above 60 billion (gallons) by 2030.'"

With that political background in mind, the A.P. story turned to some of the economic considerations of renewable fuels policy, pointing out that, "Some U.S. officials including some at the Energy Department worry that U.S. farmers won't be able to grow enough corn to meet higher clean fuel targets.

"Thanks to the ethanol boom, the U.S. corn surplus will shrink to a precarious 752 million bushels -- a three-week supply -- before this year's crop is ready for harvest, the U.S. Agriculture Department said last week.

"Explosive growth in the fuel ethanol industry has already driven corn prices to the highest level in a decade with no let-up in sight."

To read more about the  U.S.D.A production reports from last week , see this summary (" Corn Production Estimate is a Major Surprise " ) from yesterday by University of Illinois Agricultural Economist Darrel Good.

After a recap of some of the specific U.S.D.A. estimates, Dr. Good noted that, "The sharp reduction in the U.S. stocks of corn occurring this year, along with the rapid expansion in ethanol production, implies that U.S. corn production needs to increase sharply in 2007..[M]uch of the increase will come from soybeans. Soybean prices have been following corn prices higher in an attempt to prevent too large a decline in acreage. With soybean consumption at the current level of 3.066 billion bushels per year, and with a 2007 average yield near that of the past two years, soybean acreage could decline by 10 million in 2007 without bringing 2007-08 marketing year ending stocks under 250 million bushels. In addition, if March 2008 soybean futures are maintained at the current level near $7.70, Brazil will likely make a significant increase in soybean plantings in the coming year.

"For now, expect corn and soybean prices to be well supported until planting intentions are known. Significant price volatility, particularly for corn, will be associated with the planting and growing season."

Kevin Morrison , reporting in Monday's Financial Times, provided this summary of recent developments in the commodity market, "Corn prices struck a10-year high on Friday, the day the US Department of Agriculture (USDA) lowered its estimate of US corn stockpiles at the end of the year to 752m bushels, which is equivalent to three-week's supply. The previous estimate had been 935m bushels."

The FT article explained that, "The price rise comes at an important time of the year for farmers who are deciding what seeds to plant in spring.

"Based on current prices, the amount of land used for corn growing will increase this year at the expense of soyabeans and wheat.

" Last week , Keith Collins, chief economist at the USDA, told the US Senate Agriculture Committee that 2007-08 US corn demand to meet ethanol production was estimated to rise by 1bn bushels from 2.15bn this season, which ends in June.

"The ethanol industry will therefore account for about 30 per cent of demand of the US corn crop this year.

"Mr Collins told the committee the higher ethanol demand would require 6.5m more corn acres in 2007. A larger area for corn growing is likely to come at the expense of soyabeans, and to a lesser extent of wheat."

Des Moines Register reporter Philip Brasher tied together some of the political and economic issues associated with ethanol production in yesterday's paper (" Can market handle ethanol boom? ") where he noted that, "'It's a little worrisome that the industry might be overbuilding to their own detriment,' said Ron Litterer of Greene, Ia., a leader of the National Corn Growers Association and an investor in the Midwest Grain Processors ethanol plant at Lakota.

"The nation now uses about 140 billion gallons of gasoline per year, and if all of it contained 10 percent ethanol, refiners would need 14 billion gallons of ethanol.

"The industry's production capacity will reach 11.4 billion gallons per year once existing construction projects are completed. And numerous additional plants are being planned around the country, including four projects announced last week by agribusiness giant Cargill Inc."

Mr. Brasher concluded his article with this quote, "'We're going to continue with incentives to produce, but we need incentives to use' ethanol, said Jon Doggett, a lobbyist for the National Corn Growers Association."

Robert McMahon , in an analysis piece posted yesterday at the Council on Foreign Relations webpage, also hit on political and economic themes of the renewable fuels issue, noting that, "Policy experts expect the most significant energy package to emerge from the agriculture committee as it undertakes talks on renewing the 2002 Farm Bill . The previous bill included a title on energy for the first time, with incentives for ethanol and other biofuels. Despite the overriding issue of farm supports and their implications for international trade in the new bill, some reports say energy is attracting the  most attention (NYT) at this point."

McMahon added that, "But all is not quiet on the farm. In the Senate, tensions over corn's new role (Des Moines Register) as an energy source were apparent in the year's first meeting of the agriculture committee. With many experts acknowledging the small share corn-based ethanol will have in replacing the country's demand for fuel, more attention is shifting to research on cellulosic ethanol, derived from matter such as plant stalks and switchgrass. Sen. Tom Harkin (D-IA), who chairs the Senate Agriculture Committee, is emphasizing such non-food crops for fuel to help ease disputes over use of corn."

Meanwhile, the Center for Agriculture and Rural Development (C.A.R.D.) at Iowa State University   recently announced   that, " Bruce Babcock , professor of economics and director of the Center for Agricultural and Rural Development (CARD), traveled to Washington December 22 for a briefing of Secretary of Agriculture Mike Johanns on issues surrounding biorenewable fuels. The meeting was attended by the deputy secretary, the under secretaries for Rural Development and Farm and Foreign Agricultural Services, and Chief Economist Keith Collins. Much of the discussion centered on increasing E-85 fuel supply and meeting ethanol, livestock, and export demands for corn."

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