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Ethanol: Taking A Look At The Big Picture

by 5m Editor
15 November 2007, at 10:32am

US - For more than 20 years, the members of the National Corn Growers Association, its state affiliates, and non-affiliated corn farmers across the Midwest have made impassioned pleas to Congress, their state lawmakers, and anyone else they could find who might become an ethanol advocate. They won. But the emotions that have run as deep as a subsoil tillage tool are being challenged by a variety of hard economic realities. Will corn-based ethanol survive? Asks Stu Ellis.

131 ethanol plants are producing 7 billion gallons, and 82 more are in construction that will produce an additional 6.45 billion gallons; all of which would consume 4.8 billion bushels of corn.

Ethanol has become one of the first successful alternative fuels available for nationwide use, not only displacing 10% of gasoline, but providing EPA mandated oxygenates in the fuel. “But without the large increase in oil and gasoline prices that has taken place since 2002, we would not be experiencing today’s ethanol boom.” That’s the analysis of Bob Hauser, agricultural economist at the University of Illinois, who heads the Agricultural Consumer, and Environmental Economics Department which has just released an extensive economic evaluation of ethanol and its impact on the US. Pointing to the rise in petroleum prices in the past 5 years and the corresponding ethanol production that began about the same time, Hauser says the price of corn, subsidies, trade barriers, and renewable fuel policy have also helped the surge in ethanol use.

Currently 131 ethanol plants are producing 7 billion gallons, and 82 more are in construction that will produce an additional 6.45 billion gallons; all of which would consume 4.8 billion bushels of corn. Hauser’s colleagues “ran the numbers” on ethanol and using $4 corn with a 12% rate of return, they calculated the break even cost for a new plan would be $2.34 per gallon of ethanol, and at $2 corn the break even price declines to $1.62. But the economists say those prices are also dependent upon the values of co-products, governmental subsidies, and the technical abilities of ethanol as a motor fuel.

The economists contend the 51 cent per gallon federal blending subsidy has been a significant driver of ethanol demand, and if it were eliminated, then the break even level for ethanol production would be the same for both $2 and $4 corn. But Hauser says, “The effect of the subsidy is to create a breakeven ethanol price for $4.00 corn that could only be achieved with $2.00 corn without the subsidy.” Hauser says if the long term expectation for the price of oil is to be $60, then the implied break even price for ethanol refiners to pay for corn is $3.50, and with the significant demand for ethanol, then the equilibrium price for corn will be $3.50 per bushel.

Such a price level for corn would be a 50% increase from the long term equilibrium price that has been $2.40 since the mid-1970’s. And Hauser’s colleagues say that will have an impact on livestock production and the export industry, as well as production of competing crops that do not have the same return per acre, and will go as far as contributing to changes in land values.

The Illinois economists say there are numerous other ethanol factors impacting crop prices in addition to the price of oil, including ethanol blending subsidies, the tariff on imported ethanol, the 10% limitation in blending, foreign demand for US corn, and the production of ethanol from feedstocks other than corn. While those will impact the equilibrium price of corn and the break even price of ethanol, the economists believe the long run price of oil will have the greatest impact on ethanol.

Along with ethanol, a refinery also produces distillers’ dried grains with solubles, commonly known as DDGS. The Illinois economists estimate that 82% of DDGS will be used in cattle feed, 7% by hogs, and 11% by poultry. The current magnitude of production indicates livestock production is being drawn closer to ethanol plants so far in the western Cornbelt, but not yet in the eastern Cornbelt.

The Hauser report also examined other feedstocks for ethanol, such as switchgrass, corn stover, and miscanthus. None of those feed the “food versus fuel” debate, less land is consumed, marginal lands can be used, and there are specific environmental benefits not existent with corn-based ethanol.

The University of Illinois report is extensive and too large to address in a single farm gate posting. Salient portions of the report will be explored over the next several weeks.

Summary:

No one questions the value of ethanol in raising commodity prices following more than two decades of ardent support by corn farmers. However, the relatively sudden demand has been aided by the price of oil, and a prior foundation that included governmental policies. Ethanol has helped corn to a new equilibrium price of $3.50, which will have impact on livestock production, competing crops, land values, and numerous other factors. Ethanol production has also sparked changes in the Cornbelt, including drawing livestock production closer to ethanol plants which produce DDGS. The next generation of ethanol may be oriented away from corn and more toward grasses and corn stalks.

5m Editor