FarmPolicy

July 25, 2014

Biofuels- Survey of Issues

Categories: Ethanol /EU /Farm Bill

A Reuters news article from yesterday reported that, “A Republican senator said on Monday a threat by President George W. Bush to veto a farm bill is wrong, but a government official said the proposed legislation will be rejected by the president…’It will be a terrible mistake to veto this bill,’ Senator Norm Coleman (R-Minn.) said in a telephone conference call to the annual meeting of the industry group American Sugar Alliance here…’‘He (President Bush) is simply very wrong when he’s talking of vetoing this farm bill,’ Coleman, who is in Minnesota after a major bridge collapse in Minneapolis, said.”

I. Biofuels
II. Farm Bill

I. Biofuels

Food Prices

Helen H. Jensen and Bruce A. Babcock, in an article published in the current issue of the Iowa Ag Review (“Do Biofuels Mean Inexpensive Food Is a Thing of the Past?”), stated that, “Concern is growing that expanded biofuels production means the end of inexpensive food. After all, the prices of corn, soybeans, and wheat have dramatically increased and are likely to stay high. The line of thinking that expects expensive grains and oilseeds to lead to dramatically higher food costs follows the logic often used by proponents of U.S. farm programs. Many proponents justify subsidies by claiming that farm payments work to keep food plentiful and inexpensive by artificially keeping the price of commodities lower than production costs. For this justification to be valid, farm subsidies would have to expand commodity production, thereby lowering commodity market prices. Lower prices would then, in turn, lead to an expansion in the production of the food that all of us actually eat (pork chops instead of no. 2 yellow corn), which would cause food prices to be lower than they would be otherwise. Thus, according to the argument, we do not need to spend as much of our income on food. By the same logic, high commodity prices caused by subsidized biofuels should result in a reduction in the production of food and higher food prices.”

The authors also noted that, “Increased ethanol production has driven the price of corn, other feed grains, and oilseeds much higher. Because corn and soybean meal prices largely determine the price of feeding hogs, poultry, and cattle, increased feed costs will eventually result in higher market prices for pork, beef, chicken, and dairy products. Corn is also used widely as an ingredient in many processed foods. Thus, higher corn prices will also affect the cost of soft drinks, snack foods, baked goods, and many other food items.

“In general, the percentage by which the price of a particular food item increases because of higher corn prices depends on the value of corn embodied in the product relative to the price of the product. For example, if a $1.00 can of soda contains 2¢ worth of corn that is contained in high-fructose corn sweetener, then a doubling in the price of corn would increase the cost of producing the soda by at most 2¢. If all this increased cost were passed along to the consumer, then the doubling of corn prices would increase the price of soda by about 2 percent.”

The Iowa Ag Review article added that, “In a recent study, CARD [Center for Agricultural and Rural Development] researchers estimated that a 30 percent increase in the price of corn, and associated increases in the prices of wheat and soybeans, would increase egg prices by 8.1 percent, poultry prices by 5.1 percent, pork prices by 4.5 percent, beef prices by 4.1 percent, and milk prices by 2.7 percent. For all food consumed at home, average prices would increase by 1.3 percent. For food consumed away from home, average prices were estimated to increase by 0.9 percent. So, across all food consumed, 30 percent higher corn prices increase all average food prices by 1.1 percent, according to our estimates.

“The CARD assessment of modest effects on food prices of increased corn prices seems to run counter to what is happening in the supermarket. Milk prices are at an all-time high, while meat and egg prices continue to remain at historically high levels. If high corn prices are not to blame, what is? The primary cause of high milk prices is that international demand for dairy products has outstripped international supply. The lack of supply is a result of drought in Australia, a drop in subsidized milk production in the European Union, and a lack of profits in the U.S. dairy industry in recent years. Strong world demand is a result of continued strong income growth in China, India, and other Asian countries, and continued strong U.S. demand for cheese. The excess world demand for dairy products has pulled U.S. products onto world markets, thereby raising U.S. prices. Instead of fighting foreign competition, U.S. milk producers are now benefiting from international markets.”

Interestingly, Financial Times writer Bertrand Benoit pointed out last week that, “German consumers are blessed with some of the cheapest food in Europe. But the uproar over rising food prices that broke out in Berlin this week suggests that this golden era may be coming to an end.

“The federation of milk producers last weekend announced hefty price rises for milk, yoghurt, cheese and butter. By mid-week, animal fat was front-page news, and on Friday Bild carried a half-page headline about an impending surge in the price of bread.

“Snap polls of retailers showed that Aldi, the country’s leading food retailer, was planning to raise milk product prices by up to 50 per cent from next month, while others confessed that they had already begun re-labelling their stock.”

The FT article added that, “But although Germany appears more affected by price increases than other European Union countries, statistics suggest an upwards correction was due.”

Second Generation Technology

Issues associated with cellulosic ethanol production (or “second generation” technology), a process whereby ethanol can be produced from alternative feedstocks such as wood, corn stalks, or various kinds of perennial grasses, have also been in the news in both the EU and U.S. recently. Currently, a variety of technological and market factors are limiting ethanol production derived from these “second generation” sources, including a limited supply of feedstock, lack of infrastructure for commodity transport and storage, and prohibitively high costs of cellulosic ethanol production.

On July 31, the European Commission released a report entitled, “Prospects for Agricultural Markets and Income in the European Union, 2007-2014,” which noted in the Executive Summary that, “The medium-term projections depict an outlook for the EU cereal markets that would appear positive for most EU cereals thanks to the expansion of domestic consumption and cereal exports. Domestic use of cereals is foreseen to increase slightly thanks to the emerging bioethanol and biomass demand in the wake of the initiatives taken by Member States in the framework of the biofuel directive and the biomass action plan. Second generation biofuel processing technologies would become economically viable by the end of the projection period and start contributing to industrial scale to the biofuel production in the EU. Bioethanol production on cereal basis is expected to become a less marginal market outlet from 2010 onwards…”

In the U.S., a Dow Jones News item posted on July 25 at the DTN Ethanol Center indicated that, “It will likely be five years before ethanol made from cellulose crops like switchgrass will be able to make a significant impact on the U.S. fuel market, U.S. Department of Agriculture Secretary Mike Johanns said Wednesday.

“The technology to make cellulosic ethanol an economically viable fuel may be available as soon as three years from now, but there are other factors involved, Johanns told a gathering of students.

“‘Even if you have it in place in, let’s say three years, and it’s commercially viable, there’s still a lead time to build plants, engineer and do all of those things,’ Johanns said. ‘I do think that it’s probably going to be on the outer end of that three- to five-year schedule by the time you factor all of that in.’”

Oil Prices – Ethanol Profitability

Until “second generation” technology becomes viable, it appears that corn will remain the primary feedstock for ethanol production in the U.S. A significant variable in the profitability of corn-based ethanol production is the price of crude oil.

In a report released this spring (“Crude Oil Price Variability and its Impact on Break-even Corn Prices”), University of Illinois Agricultural Economists Gary Schnitkey, Darrel Good and Paul Ellinger stated that, “Increasing use of corn in ethanol production holds the promise of increasing corn prices such that average corn prices in the future will be higher than average historical prices. However, ethanol production may not reduce corn price variability. As corn use in ethanol production increases, corn prices will be more influenced by oil prices. Like corn, crude oil and gasoline are commodities and are subject to price swings as a result of supply and demand changes.

“Once Federal mandates for use of biofuels are reached, ethanol’s primary use will be as a substitute for gasoline. As such, the ethanol price will have to be competitive with the gasoline price so that consumers will buy ethanol-blended fuels. Because corn is the major production cost for ethanol, the price an ethanol producer will be willing to pay for corn, hereafter referred to as the break-even corn price, will be directly related to the ethanol price. As the ethanol price increases, the break-even corn price increases. Moreover, ethanol price will be directly related to crude oil price. Therefore, break-even corn prices will be positively related to crude oil prices. As crude oil price increases, the price of gasoline will increase leading to higher ethanol and break-even corn prices. Conversely, decreases in crude oil price will lead to a lower gasoline price, a lower ethanol price, and a lower break-even corn price.”

After a more detailed explanation of the calculations, the authors provided this Table that illustrates the relationship between crude oil, gasoline, ethanol and break-even corn prices.

For example, if oil is $30 per barrel, the break-even price of corn that could cover all of the costs of ethanol production is $2.75 per bushel. If oil were $60 per barrel, this break-even price increases to $4.74 per bushel; and at $100 per barrel, corn priced at $7.38 would still allow for all the costs of ethanol production to be covered.

Current growing conditions and the potential supply of corn is another factor that will influence the market price of corn and have in impact on the profitability of ethanol production.

John Perkins noted yesterday at Brownfield that, “The United States Department of Agriculture’s National Ag Statistics Service reports that as of Sunday, August 5… Corn is rated 56% good to excellent, 2% lower than a week ago.”

Associated Press writer Lauren Villagran reported yesterday that, “December corn ended unchanged at $3.43 a bushel,” and “Light, sweet crude for September delivery lost $3.42, or 4.5 percent, to settle at $72.06 a barrel.”

Despite the USDA’s corn condition estimate, a recent University of Illinois Extension item indicated that, “Some argue that the crop is already ‘made’ and is out of harms way. However, models relating trend yield and state average monthly precipitation and temperature to actual state average yields in Illinois, Indiana, and Iowa indicate that August weather has a significant impact on average yields. While August precipitation has less impact than July precipitation on average yields, August temperature appears to have an equal or larger impact than July temperatures [unpublished research by Mike Tunnura, Department of Agricultural and Consumer Economics, University of Illinois].

“The USDA will release the first yield and production forecast for the 2007 crop on August 10. The forecast will be based on a combination of factors, including field observations in 10 states and national farm operator surveys (about 27,000 in 2006). That input will reflect conditions through early August so that subsequent forecasts will be influenced by August and September weather. Over the past 11 years of generally favorable growing conditions, the average yield forecast in August was below the January estimate following harvest in 8 years. In those 8 years, the January estimate exceeded the August forecast by an average of 5.8 bushels, in a range of 1.7 to 11.5 bushels. The January estimate was below the August forecast in 1999, 2000, and 2006, by an average of 2.9 bushels and in a range fo 0.9 to 4.8 bushels.”

Development

In an opinion piece published in yesterday’s International Herald Tribune, Antonio José Ferreira Simões, the director of the Department of Energy in Brazil’s Ministry of Foreign Affairs, stated that, “One of the most common myths is that biofuels will necessarily compete with food production. Nowadays, the largest food producers are the developed countries that strongly subsidize their agriculture. In developing countries, with few exceptions, large scale food production does not occur: They simply cannot compete with rich countries’ agricultural subsidies. It is more cost-effective to import products offered as food aid from developed countries, or sold at subsidized prices, than to produce locally.

“Production of biofuels in developing countries would change this picture. Large extensions of unutilized arable land in the Southern Hemisphere would be employed for highly profitable biofuel-oriented crops, restructuring the agricultural sector. Millions of jobs would be generated, thus increasing income, exports and food purchasing power of the poorest. Furthermore, production of biofuels in the South would help avoid redirecting the use of food-producing land in the North for this purpose.

“In Brazil, biofuels production has grown alongside with increasing food crops. It is lack of income that fuels hunger, not the use of biofuels. Experience has proven that Biofuels production generates income, increasing food consumption. The Brazilian ethanol industry generates one million direct jobs and up to six million indirect jobs. Biodiesel benefits 224 thousand low-income families.”

Concluding, the item indicated that, “Nowadays, world energy resources are concentrated in 20 countries. Biofuels will allow a true democratization of the international market, as over 100 countries will be producing energy for the world. There is no doubt about the fact that this is a great change, maybe as revolutionary as the one that began in the early 20th Century. After all, the transition from animal traction to petroleum was antipodal to environmental sustainability. Today, we can correct this and, at the same time, contribute to the generation of employment and wealth in the countries of the South – much to the benefit of the global community.”

II. Farm Bill

An update posted yesterday at the farm gate blog (University of Illinois Extension) noted that, “Congress has two months to finish work on a new Farm Bill before the 2002 legislation expires, and one month of that is summer vacation. What would happen if they don’t get the job done?”

The update stated that, “Agriculture Policy Specialist Jasper Womach of the Congressional Research Service anticipated the possibility that the new legislation would not be finished in time for the 2002 Farm Bill to expire. In his CRS Report for Congress, Womach divides duties into mandatory, such as commodity support programs, food stamps, and conservation, compared to discretionary programs that include rural development projects, ag research, and foreign food aid that all need Congressional appropriations.

“The permanent law of 1938 is always on the books, and its provisions are periodically modified by four to six year Farm Bills to address current issues and needs. Womach says there is recent precedent for the Farm Bill to miss its implementation deadline when the prior legislation expires. The 1981 and 1985 Farm Bills were enacted in December, and the 1990 Farm Bill arrived in November. The 1995 Farm Bill was more than six months late, but spring arrived on time and crops were planted.

“Womach says the only farmers who face some precarious decisions are those who will be planting winter wheat this fall. ‘Absence of a new farm bill poses some risk for crops harvested in 2008, particularly winter wheat that is harvested in early summer, but typically harvest comes late in the calendar year for most subsidized crops. Lack of new commodity support legislation before harvest in 2008 does little harm other than to leave farmers uncertain about the size of payments they might receive.’ Womach says there may be some unanswered questions about payments that can be calculated into repayments for production credit loans.

“Some quarters in Washington actually favor an extension of the 2002 legislation, and may push the Senate to delay its action and just renew the provisions of the 2002 Farm Bill for another year. Womach says that would probably not occur until close to the 2008 harvest. Those discretionary programs would need annual funding approved, but that would be little more than the annual agricultural appropriations actions.”

A Reuters news article from yesterday (via DTN, link requires subscription) reported that, “A Republican senator said on Monday a threat by President George W. Bush to veto a farm bill is wrong, but a government official said the proposed legislation will be rejected by the president.

“‘It will be a terrible mistake to veto this bill,’ Senator Norm Coleman (R-Minn.) said in a telephone conference call to the annual meeting of the industry group American Sugar Alliance here.

“‘He (President Bush) is simply very wrong when he’s talking of vetoing this farm bill,’ Coleman, who is in Minnesota after a major bridge collapse in Minneapolis, said.”

The article added that, “The House Agriculture Committee recently approved a five-year farm bill which sets spending and farm supports for American farmers.

“Bush administration officials said the proposed bill included provisions which would raise support levels that they claim are trade-distorting and would draw fire from U.S. trade rivals who could file complaints at the World Trade Organization.

“In a video hook-up from the U.S. Agriculture Department, Undersecretary Mark Keenum said the increases in items like loan rates is ‘very problematic for us.’

“‘The veto threat is very real,’ he said.”

Keith Good

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