Betty Jo Gigot, Editor and Publisher

The Million Dollar Question
Are We Ready For Ethanol? That’s the million-dollar question and the title of last issue’s Beef Biz – an introductory look at some of the impending implications of an ever-expanding ethanol industry. But before we go further, let’s back up and have a quick review. The nation’s ethanol output will expand by 55 percent during 2007 – that represents an additional three billion gallons. Next year’s expansion will pile on another 2.3 billion gallons. By the end of the decade total annual production will have increased 6.5 billion gallons in just three years and pegged to exceed 12 billion gallons.

2010’s targeted production marks a sevenfold increase in just ten years. But the story doesn’t end there. Recall last time that I also discussed the Senate’s renewable energy mandate: 36 billion gallons by 2022. Meanwhile, mid-October marked a similar type of benchmark from the House – the “25 by ’25 Resolution” requires that at least 25 percent of total U.S. energy consumption be derived from renewable sources by 2025. Conference negotiations have yet to begin; where renewable energy legislation ends up in a Senate-House compromise remains to be seen. One thing’s for certain – there’s more ethanol looming on the horizon.

The upshot of that development is hugely important. For example, USDA projects approximately 3.2 billion bushels of corn to be diverted to ethanol production during the next corn-marketing year (September through August); that represents nearly a quarter of the nation’s 2007 production. By 2010, ethanol’s corn utilization will increase to 4.7 billion bushels. Now, let’s stretch that even further. What if the government adopts the 36-billion-gallon mandate? A best-case scenario in terms of production efficiency represents diverting over 13 billion bushels of corn to ethanol; that’s nearly all of this year’s record production (recognizing that some of those 36 billion gallons will be biodiesel, not ethanol).

Alternatively, new laws requiring E10 (10 percent ethanol) potentially represent some type of middle-of-the-road compromise (no pun intended) between where we are now and the 36-billion-gallon benchmark. U.S. daily gasoline utilization currently stands at 400 million gallons per day or approximately 146 billion gallons annually. Replacing 10 percent of that utilization with ethanol on an energy-equivalent basis requires approximately 21.5 billion gallons of ethanol – that’s nearly four times larger than current production of 5.5 billion gallons and represents 8.25 billion bushels of corn.

That leaves us with the enduring “food versus fuel” issue, which is quickly become a dramatic battle for acreage within the markets. The corn market hasn’t been the only benefactor of the ethanol industry – wheat and soybeans have had their own friendly runs of late. Regardless of where we end up, the scope and scale of future ethanol production portends some volatile markets and hotly debated policy decisions. There could be some bitter battles about who does and doesn’t get access to the corn crop. That’s only one layer of perspective, though. The real debate goes deeper with longer-lasting ramifications.

Several other factors are creeping into the discussion about renewable energy sources. The first and most immediate concern arises over water utilization and availability. Ethanol plants require large amounts of water. The Wall Street Journal (Oct. 17, 2007) addressed the potential battle that may ensue relative to water availability. Bill Simpkins, Ph.D., Iowa State University Hydrologist, explains that in many areas where plants are being constructed it’s difficult to determine if water availability is sufficient, especially in light of the large unknowns about future usage. According to Dr. Simpkins, that state of affairs means “there are going to be conflicts and there are going to be lawsuits.” Second, the issue of rising land values continues to be a major influence in rural America. I briefly touched on that issue last month relative to the phenomenon of skyrocketing land values. USDA’s annual summary of land values, published in September, indicated cropland was up 13 percent while pasture values were up 16 percent versus a year ago.

The bottom line is that we’re only at the front edge of some important implications for agriculture as the ethanol industry grows and develops. The Organization for Economic Cooperation and Development just published an in-depth study entitled “Biofuels: Is the Cure Worse Than the Disease?” (Sept. 2007). OECD summarizes this way: “…land use will be driven by the net private benefit owners can derive from their land. Any diversion of land from food or feed production to production of energy biomass will influence food prices from the start, as both compete for the same inputs. The effects on farm commodity prices can already be seen today. The rapid growth of the biofuels industry is likely to keep these prices high and rising throughout at least the next decade.”

The story will be one of a rapidly shifting agricultural economy. So … are we really ready for ethanol?