FarmPolicy

February 20, 2020

Ethanol – Market Prices – Ramifications

Categories: Ethanol /Farm Bill

I. Ethanol – Market Prices – Ramifications
II. Farm Bill Issues

I. Ethanol – Market Prices – Ramifications

Edmund L. Andrews reported in today’s New York Times that, “President Bush put on a white coat and visited a laboratory here Thursday to promote his goals for making alternative fuels from switch grass, woodchips and other plant waste.

“After touring the laboratory, which is developing enzymes to make cellulosic ethanol, fuel distilled from plant byproducts, Mr. Bush spoke buoyantly about new technologies that may reduce the nation’s thirst for foreign oil.

“‘Doesn’t it make sense to be able to say to our farmers, grow what you can grow so we become less dependent on oil?’ the president told an audience at Novozymes North America, the subsidiary of a Danish technology company. ‘I like the idea of a president being able to say, wow, the crop report is in, we’re growing more corn than ever before, which means we’re importing less oil from overseas.’”



Corn prices continue to rise (Graph from The Economist Online).

The Times article added that, “Corn-based ethanol is the primary substitute for gasoline, and output is about seven billion gallons a year. But industry experts and administration officials estimate that corn-based ethanol can at most supply only half the alternative fuel Mr. Bush has proposed.”

And in conclusion, today’s NY Times article indicated that, “At one point, Mr. Bush jumped in to explain that corn-based ethanol could not provide enough alternative fuel because ethanol demand was already outstripping supply.

“‘We got a lot of hog growers around the United States, and a lot of them here in North Carolina, who are beginning to feel the pinch as a result of high corn prices,’ he said. ‘The question, then, is how do you achieve your goal of less dependence on oil without breaking your farmers — without breaking your hog raisers?’

“‘Here’s how: You develop new technologies that will enable you to make ethanol from wood chips, or stalk grass, or agricultural waste.’”

A White House transcript of the President’s remarks in North Carolina yesterday included this broader context of his remarks regarding corn prices; “The problem is we got a lot of hog growers around the United States and a lot of them here in North Carolina who are beginning to feel the pinch as a result of high corn prices. A lot of the cattle people around the United States — I have got a few of them in my home state of Texas — they’re worried about high corn prices affecting their making a livelihood. In other words, the demand for corn, because of agricultural use, and now energy use, is causing corn prices to go up. I bet you the Agriculture Commissioner is hearing from folks.

“And so how do — the question then is, how do you achieve your goal of less dependence on oil without breaking your farmers — without breaking your hog raisers — corn farmers happen to like it, but I’m talking about the — (laughter) — people dependent on corn.

“And here’s how: You develop new technologies that will enable you to make ethanol from wood chips, or stalk grass, or agricultural waste. And that’s what we’re here to talk about: Is it possible, and if it is possible, how close are we to achieving the technological breakthroughs that I believe are possible so that our — so that we’re changing our habits.”

Meanwhile, corn prices continue to demonstrate strength.

Financial Times writer Kevin Morrison reported yesterday that, “Agricultural commodity prices reached long-term highs yesterday following trader talk that a weather forecaster had hinted the key US midwest crop-growing region could be facing a hot and dry summer.

“US grain and oilseed markets are very sensitive now with demand from biofuels having a significant impact on prices and any rumours of a poor US corn crop is likely to have a big influence on prices.

“Corn for March delivery rose to a 10-year high of $4.26 a bushel on the Chicago Board of Trade, up more than 10 cents on the day.

“Corn prices have almost doubled since August as the US, the world’s largest corn grower, cut its crop estimates following a dry summer.”

The FT article noted that, “The higher corn price also pushed up other crop futures with March CBOT soyabean futures touching $7.81 a bushel, their highest level since July 2004.

“Soyabean prices have risen almost 50 per cent since September.”

An article posted earlier this week at The Economist webpage (“Betting the farm”), indicated that, “High oil prices, a desire for energy security, and regulations designed to reduce carbon emissions, have prompted governments to favour ethanol as an alternative to petrol as a motor fuel.”

After explaining that Brazil primarily uses sugar to make ethanol, while the U.S. relies on corn, the article noted that, “What about other agricultural products? Global warming may be having a further impact here by virtue of the drought in Australia (part of a long-term trend, rather than a one-off disaster), which has forced up wheat prices. High corn prices are also encouraging farmers to rotate their crops away from soybeans, and are likely to force prices for that crop higher.

“All of the above (corn, soybeans and wheat) are key parts of the feed chain for cattle and pig farmers. And thus, inevitably, they will drive up livestock prices. There is a lag involved. Merrill estimates that, if grain prices rise by 30%, livestock prices will jump 10% after a period of three to six months.

“It does not really matter whether cattle farmers have the market position to pass on higher grain prices to their customers. Even if they do not have that power, the result will be that they will raise fewer cows and pigs. That may already be happening with a fall in the numbers of cattle and pigs placed on feed. Demand for beef, ham and bacon is unlikely to suffer. As Asian countries grow wealthier, they are likely to move to more meat-based diets.

“The knock-on effects may go even further. Higher food prices may give an upward push to headline inflation, prompting central banks to raise rates (or not lower them) in response. In turn, that may act as a brake on global economic growth. Furthermore, to the extent that consumers need to spend more money on food, they will have less money to spend on other goods and services.”

In other recent ethanol analysis, Dave Juday authored an article entitled, “The Corn Threat,” that was posted yesterday at National Review Online.

Mr. Juday stated that, “President Bush proposed in his State of the Union speech a plan for renewable energy that his own press shop and their surrogates called ‘bold.’ A better description would be ‘reckless.’ A history of how Bush got to this point is instructive.”

While looking at the politics regarding the passage of the Energy Policy Act of 2005 (which contains the Renewable-Fuels Mandate), the article explained that, “Through the congressional obstruction period of 2002-04, when Bush’s energy plan was held political hostage, the renewable-fuels mandate was expanded to five-billion gallons in a consensus handshake agreement among all parties — ethanol makers, oil refineries, corn growers, and other stakeholders. At the eleventh hour, before the bill was passed, the mandate was upped to 7.5 billion gallons at the insistence of the ethanol lobby.

“Ironically, that particular level was chosen because the Governors’ Ethanol Coalition — a group of governors that was once headed by now Bush secretary of Agriculture and then Nebraska governor Mike Johanns — had commissioned a study to try to pinpoint the practical upper limits of ethanol demand for corn. The study concluded that beyond eight-billion gallons, ethanol demand for corn would be detrimental to the other traditional — and larger — uses of corn: livestock feed, food, and exports. Hence the mandate of 7.5 billion gallons, to be reached by 2012.”

Mr. Juday continued, stating that, “Indeed, this is a critical balance of food versus fuel, not only for U.S. livestock farmers and food consumers, but for a larger global economic order. The U.S. heartland is to corn as the Saudi Arabian desert is to petroleum. The U.S. produces 40 percent of the world’s corn and is the largest global supplier. Newly affluent and emerging middle classes in developing countries — who in turn bring more political stability to the developing world — have for the past two decades demanded better diets in terms of protein, i.e., meat, milk, and eggs. That demand has been met in no small part because of U.S. corn.

“Economic forecasters of all stripes should be impressed by the accuracy of Governors’ Ethanol Coalition study. It was virtually spot-on. In August of 2006, the sum of actual ethanol production-capacity in place, plus the planned capacity of those ethanol facilities that were already under construction passed the eight billion gallon mark as ethanol plants overshot the 7.5 billion gallon mandate. The average corn price in August 2006, at the end of the last crop year, was $2.09, but when current and prospective ethanol capacity hit the eight billion gallon level, corn prices started a bull trend, still in place. On January 23, the day of the State of the Union speech, corn was $4.09 per bushel. Many analysts expect $5.00 per bushel before this is over.”

And with respect to cellulosic ethanol, Mr. Juday noted that, “Much of the renewable fuels on which his plan relies is assumed to be from cellulosic biomass (e.g., corn stalks). Nonetheless, today, there is no ethanol commercially produced from cellulosic biomass feedstock in the U.S. To put that in further context, in the Bush administration’s own 2007 Annual Energy Outlook, produced by the Energy Information Agency of the Department of Energy, cellulosic biomass ethanol is projected to reach 300 million gallons by 2030 — 13 years after Bush’s deadline of 35 billion gallons of mandated ethanol-use in the U.S. motor fuel supply.

“Moreover, the cellulosic ethanol production which is still being developed is far less efficient than corn ethanol. One metric ton of corn produces about 110 gallons of ethanol currently; the only existing cellulosic ethanol plant in operation is a test facility in Canada, where they produce about 84 gallons per ton. Unless the technology and efficiency change dramatically in the next ten years, there still will be no incentive to use cellulosic ethanol over corn based ethanol.

“In short, based on current technology, and the government’s best-educated projections, corn is still practically on the line for 34 billion of the 35 billion mandated-, renewable-, and alternative-fuel gallons in the next ten years. Still an impossible level to meet. Of course, the bottom-line policy blunder is this: Bush’s plan mandates the near-term future use of motor fuels that today are not available. That is utterly irresponsible. Especially considering the consequences, which are far wider than just the agricultural sector.”

***

As the debate over the 2007 Farm Bill moves forward, policy makers will have to balance large, big picture issues such as ethanol, prices and food costs with local concerns expressed by constituents. As some anecdotal articles below indicate, lawmakers and other stakeholders are holding regional meetings on the new farm law in a variety of settings around the country.

II. Farm Bill Issues

Associated Press writer Jill Zeman reported yesterday that, “Two members of the U.S. Senate’s agriculture committee vow to fight proposed cuts in farm subsidies, despite resistance from urban lawmakers and other countries.

“‘The fact is, there are fewer and fewer members of Congress representing rural states or districts that depend on an agriculturally based economy, not to mention fewer and fewer members of Congress that actually have a direct relationship with production agriculture,’ said Arkansas Sen. Blanche Lincoln.

“Lincoln, a farmer’s daughter, and Georgia Sen. Saxby Chambliss, whose son-in-law is a farmer, spoke Wednesday at a farm bill forum sponsored by the University of Arkansas Clinton School of Public Service.

“Chambliss, the ranking Republican on the Senate Agriculture, Nutrition and Forestry Committee, said the renewal of the farm bill might entail a battle with the Bush administration, but that Congress ultimately will decide what to fund.”

The A.P. article added that, “Lincoln said many nations oppose subsidies for U.S. farmers, arguing that they make trade between countries unfair. Lincoln said the U.S. market is open to foreign agricultural goods, but that ‘changes must occur in places other than just the United States.’

“The U.S. needs to deal with trade issues with foreign countries before cutting subsidies to farmers, Lincoln said. Otherwise, the U.S. would have no leverage in trade negotiations, she said.”

Brandy Nance, writing yesterday at The Emporia Gazette (Kansas) reported that, “With the current Farm Bill set to expire in September, more groups are wanting input on a new package, experts said Wednesday.

“Troy Dumler, extension agricultural economist from Kansas State University; Sam Funk, agricultural policy specialist from the Department of Agricultural Economics at Kansas State University; and Brad Lubben, extension policy specialist of the Department of Agricultural Economics from the University of Nebraska-Lincoln, discussed the 2007 Farm Bill proposals with a group of people at the American Legion Post No. 5.”

The article stated that, “Lubben spoke about the drivers of the 2007 Farm Bill debate. He said the farm economy is good right now.

“‘We have had the four greatest net income farming years nationally,’ Lubben said.”

“The current Farm Bill expires in September of this year, which will take farmers through this year’s crop, Lubben said. He said this time, there are more players at the table. Conservation groups want more money; food safety and Homeland Security are new to the game; nutrition and food assistance programs are key to the Farm Bill Coalition; and rural development and energy organizations are looking for funding.”

Also, the article indicated that, “Dumler… [t]alked about three revenue-based proposals by the USDA, the National Corn Growers Association and the American Farmland Trust. Each has proposed programs designed to achieve the same goal, but use different means to do so. Two of the proposals (USDA and AFT) trigger payments when national revenue falls below the target level. The other proposal by the NCGA triggers payments when county and individual farm revenue falls below the target level.”

Reed Fujii, writing in Wednesday’s Stockton Record (California) reported that, “California agricultural leaders gathered Tuesday in Modesto to highlight what they like and dislike about the proposed 2007 farm bill, legislation that will direct billions of dollars of U.S. government largess over the next five years.

“During the listening session hosted by Rep. Dennis Cardoza, D-Merced, they found a lot to like, such as increased conservation spending, support for bioenergy research and targeted aid for specialty crops – widely grown in California but which do not get direct price supports of major commodities, such as corn, wheat, cotton and soybeans.”

The article noted that, “Overall, the Bush Administration’s proposal got good marks, as it promises to give California farmers more of that they need.

“‘People are really committed to trying to make this bill work,’ said Cardoza, who as chairman of the Subcommittee on Horticultural and Organic Agriculture will be on the conference committee expected to hash out the farm bill’s final form later this year.”

Susan Salisbury, writing in yesterday’s Palm Beach Post (Florida), reported that, “Strawberries, oranges, tomatoes, nursery plants and other specialty crops grown in Florida would gain a bigger share of federal dollars than ever before under the proposed 2007 Farm Bill.

“The close to $5 billion proposed for a portion of the bill would enhance specialty crop production by requiring the purchase of more fruit and vegetables for school meals and setting up an expansion of export markets.

“It’s a start, growers say, but much more needs to be done.

“On Wednesday, several dozen agricultural leaders from the sugar, vegetable, citrus, strawberry, dairy, cattle and nursery industries met with U.S. Reps. Adam Putnam, R-Bartow, and Tim Mahoney, D-Palm Beach Gardens, at the University of Florida’s Indian River Research and Education Center in Fort Pierce and outlined some of their most pressing issues.”

The article added that, “Traditionally, so-called commodity or program crops, such as wheat, soybeans, cotton and rice, have received the bulk of the farm bill benefits, often in the form of direct subsidies. Even the disaster payment programs are designed more for other parts of the country than for Florida, the agriculture leaders said.

“Mahoney, who serves on the House Agriculture Committee, said he finds himself surrounded by congressmen from the commodity states. ‘We ask for very little in comparison to what we contribute,’ he said.”

Brian Gadd
reported recently at the Coshocton Tribune (Ohio) that, “U.S. Rep. Zack Space heard comments from area farmers and agriculture officials here Wednesday as he continued his 7-Day Farm Tour to gather information to take back to the House Agriculture Committee.

“The committee will be making recommendations this year which will become a part of the renewed Farm Bill, which was last updated in 2002.”

The article added that, “Brad Ross, a representative with the Ohio Federation of Soil and Water Conservation Districts spoke about the need for federal conservation programs to be consolidated to make them easier to participate in and administer on the local level.

“The Congressman said he would take all of the comments he heard during the 2-hour session to heart and use them as impetus to do more research on the subjects so that the district’s voices would be heard in Washington.”

Senate Budget Committee Chairman Kent Conrad (D-N.D.) has also been meeting with constituents regarding the 2007 Farm Bill. A recent article, which also includes a brief video segment of Senator Conrad, quoted him as saying, “It’s important for people to understand this legislation is absolutely critical to the number one industry in North Dakota and we got a lot at stake as a state. And so we gotta do our very best to get those same kind of results going forward, it’s absolutely essential to the economic well-being of North Dakota.”

Mark Steil of Minnesota Public Radio reported on Wednesday that, “Minnesota 1st District Representative Tim Walz predicts a ‘bloody battle’ when Congress takes up the new farm bill later this year. Southern Minnesota farmers told Walz they want changes made in the legislation to help small farmers. The meeting in Worthington is one of several Walz will hold. It’s a discussion which touches just about anyone who owns farmland anywhere in the U.S.”

The article noted that, “Southwest Minnesota farmer Jim Joens says a big problem with subsidies is that they raise farmland values. He says land prices have increased rapidly the past few years, making it almost impossible for young farmers to buy or in some cases even rent acres. Joens says subsidies should be targeted at small farms to help them stay in business.”

-Keith Good

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