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Biofuels: Oil & Corn Prices, Environmental Concerns

Brian Baskin, writing in today’s Wall Street Journal, reported that, “Light, sweet crude for April delivery rose $2.75, or 2.6%, to $107.90 a barrel on the New York Mercantile Exchange, a settlement record. The front-month contract hit an intraday high of $108.21, marking the ninth out of the last 10 sessions in which a record was set.

“Futures have risen $20 in less than two months, largely on the weakness in the dollar, which makes commodities priced in the U.S. currency relatively cheap for buyers in other currencies.”

And Steven Mufson reported in today’s Washington Post that, “Crude oil prices shattered another record yesterday, hitting $108 a barrel while the price of regular unleaded gasoline at the pump came within half a cent of its all-time high.”

Unleaded gasoline is the most widely used form of liquid fuel in the United States. Since gasoline is made from petroleum, which is derived from crude oil, the price of unleaded gasoline is correlated to the price of crude oil. An increase in the price of oil could also impact the price competitiveness of ethanol, potentially making ethanol a relatively cheaper input for fuel blenders to use compared to unleaded gasoline.

A Bloomberg news article from today noted that, “Ethanol prices rose Monday as crude oil futures advanced to a record and gasoline gained. Corn, the primary ingredient for ethanol in the United States, surged about 4 percent.”

“Denatured ethanol for April delivery rose 3.9 cents, or 1.7 percent, to settle at $2.389 a gallon on the Chicago Board of Trade. The grain-based additive is about 3 percent higher than a year ago.”

A webpage generated by the State of Nebraska, which depicts the average monthly rack prices for ethanol and unleaded gasoline (F.O.B.- Omaha) indicated an average ethanol rack price of $2.12 for February 2007. For February 2008, this average had increased to $2.31. The annual average rack price of ethanol in 2007 was $2.24, according to the webpage.

In addition to the price of oil, the price of corn is another key variable that impacts the production of biofuels.

With respect to the futures price of corn, an update posted yesterday at the Chicago Board of Trade Online stated that, “May Corn finished up 18 1/2 at 565 3/4, 3/4 off the high and 38 1/2 up from the low. December Corn closed up 19 3/4 at 579. This was 38 3/4 up from the low and 1/4 off the high.”

Both oil and corn prices were discussed in a recent Reuters news article regarding the profitability of ethanol production.

The article, which was posted on Thursday, stated that, “Average profits for distilling U.S. ethanol were steady this week as strong prices for corn, the main ethanol input, balanced rising prices for fuels, analysts said.

“Citigroup Global Markets analyst David Driscoll said in a research note that average distilling margins were about 18 cents per gallon as prices for ethanol held at about 8-month highs, supported by crude oil prices at record levels.

“That margin level was in range from last week’s margins, which averaged about 15 to 25 cents, analysts said.”

The article noted that, “Higher corn prices kept margins steady, however.”

Concluding, the Reuters item stated that, “Analysts and producers have said that low profits for U.S. ethanol distillers could stay depressed until more terminals are built to help producers ease transport of the fuel from the Midwest to the coasts — which could take 18 months to two years.”

With respect to the location of ethanol production plants, Brett Clanton reported in last week’s Houston Chronicle that, “Texas may be a latecomer to the ethanol business, but it is about to announce its arrival in a big way.

“At a ceremony today in this small town near Amarillo, where cattle far outnumber residents and the brown, flat land extends forever in all directions, a Dallas company will formally open the state’s first large-scale ethanol plant. It is one of the nation’s biggest.”

Mr. Clanton added that, “Yet it won’t have bragging rights long. Three more major plants are to open this year in the Panhandle, and other projects are in the works.

“With the new plants, Texas is poised to emerge as a key regional hub for ethanol production — now centered in the corn-rich Midwest — as U.S. demand rises for the renewable fuel.”

Nonetheless, the Houston Chronicle article noted that, “But even the companies behind the projects acknowledge this isn’t the best time to be opening new corn ethanol plants.

“Not only are grain prices cutting into profits and investors fleeing the market, but more questions are being raised about the environmental impact and negative economic ripple effects of making the fuel from corn.”

With respect to environmental concerns, Reuters writer Deborah Zabarenko reported yesterday that, “Growing more corn to meet the projected U.S. demand for ethanol could worsen an expanding ‘dead zone’ in the Gulf of Mexico that is bad for crawfish, shrimp and local fisheries, researchers reported on Monday.”

The article stated that, “The low levels of oxygen in the zone make it difficult for crustaceans and bottom-feeding fish to survive, said Simon Donner, who worked on the study published the Proceedings of the National Academy of Sciences… ‘And now with this incentive to produce more corn and use more fertilizer, we’re pushing in the other direction,’ Donner said. ‘The two policies are just completely incongruous.’”

Meanwhile, Brenda Goodman reported in today’s New York Times that, “After residents of the Riverbend Farms subdivision noticed that an oily, fetid substance had begun fouling the Black Warrior River, which runs through their backyards, Mark Storey, a retired petroleum plant worker, hopped into his boat to follow it upstream to its source.

“It turned out to be an old chemical factory that had been converted into Alabama’s first biodiesel plant, a refinery that intended to turn soybean oil into earth-friendly fuel.”

Ms. Goodman noted that, “The spills, at the Alabama Biodiesel Corporation plant outside this city about 17 miles from Tuscaloosa, are similar to others that have come from biofuel plants in the Midwest. The discharges, which can be hazardous to birds and fish, have many people scratching their heads over the seeming incongruity of pollution from an industry that sells products with the promise of blue skies and clear streams.

“‘Ironic, isn’t it?’ said Barbara Lynch, who supervises environmental compliance inspectors for the Iowa Department of Natural Resources. ‘This is big business. There’s a lot of money involved.’

“Iowa leads the nation in biofuel production, with 42 ethanol and biodiesel refineries in production and 18 more plants under construction, according to the Renewable Fuels Association. In the summer of 2006, a Cargill biodiesel plant in Iowa Falls improperly disposed of 135,000 gallons of liquid oil and grease, which ran into a stream killing hundreds of fish.”

The Times article reported that, “According to the National Biodiesel Board, a trade group, biodiesel is nontoxic, biodegradable and suitable for sensitive environments, but scientists say that position understates its potential environmental impact.

“‘They’re really considered nontoxic, as you would expect,’ said Bruce P. Hollebone, a researcher with Environment Canada in Ottawa and one of the world’s leading experts on the environmental impact of vegetable oil and glycerin spills.

“‘You can eat the stuff, after all,’ Mr. Hollebone said. ‘But as with most organic materials, oil and glycerin deplete the oxygen content of water very quickly, and that will suffocate fish and other organisms. And for birds, a vegetable oil spill is just as deadly as a crude oil spill.’”

Later, the article noted that, “Don Scott, an engineer for the National Biodiesel Board, acknowledges that some producers have had problems complying with environmental rules but says those violations have been infrequent in an industry that nearly doubled in size in one year, to 160 plants in the United States at the end of 2007 from 90 plants at the end of 2006.

“Mr. Scott said that the board had been working with state and environmental agencies to educate member companies and that the troubles were ‘growing pains.’”

And in conclusion, the Times article indicated that, “For some, the troubles of the industry seem to outweigh its benefits.

“‘They’re environmental Jimmy Swaggarts, in my opinion,’ said Representative Brian P. Bilbray, Republican of California, who spoke out against the $18 billion energy package recently passed by Congress that provides tax credits for biofuels. ‘What is being sold as green fuel just doesn’t pencil out.’”

Trade- Doha

Reuters writer Paul Taylor reported yesterday that, “To hear some U.S. presidential candidates and European leaders talk, you would think hard times lay ahead for advocates of free trade.

“Senators Hillary Rodham Clinton and Barack Obama in the Democratic primaries are criticizing the North American Free Trade Agreement with Canada and Mexico and vowing to renegotiate it to protect American workers.”

Mr. Taylor noted that, “On the other side of the Atlantic, President Nicolas Sarkozy of France has urged Europeans to stop being naïve about trade and to develop ‘a real system of community preferences’ to protect European Union agriculture and industry from unfair competition.

“Political opposition has forced the EU’s trade commissioner, Peter Mandelson, to delay changes in anti-dumping duties meant to take account of the interests of European firms that produce goods in low-cost countries.”

The article stated that, “Mandelson has broad powers to negotiate trade agreements on behalf of the 27-nation bloc, but France is doing its best to handcuff him and organized a caucus of 20 farm ministers last month to warn against further concessions on agriculture.”

Mr. Taylor then explained that, “All this sets a grim backdrop for negotiators at the World Trade Organization, who are preparing yet another ‘final push’ for a global deal to cut tariffs and remove trade barriers. Their aim is to clinch a deal before President George W. Bush leaves office next January…The trade organization’s director general, Pascal Lamy, says the downturn on both sides of the Atlantic should focus minds on the benefits of a trade agreement, not least because failure would damage confidence in the world economy. Keith Rockwell, a spokesman for the agency, said, ‘Do you fix the roof when the sun is shining or when it’s raining? Either way, it’s still a good idea to fix the roof.’”

And near the end of his article, Mr. Taylor reported that, “‘I share the skepticism that anything good will come out of the Doha Development Agenda,’ said Adam Posen of the Peterson Institute for International Economics in Washington, using the name given to the trade round that began in Qatar in 2001.

“Posen said that whoever wins the White House in November, Congress will make trade conditional on labor and environmental standards to shut out cheap competition, mainly from Asia.

“Andre Sapir, a trade economist at the Free University of Brussels and former adviser to the European Commission, agrees that the climate in the United States is not favorable for new trade deals, although the Europeans should still push for one.”

Farm Bill

DTN Political Correspondent Jerry Hagstrom reported yesterday (link requires subscription) that, “The chairman of the House Agriculture Committee said Monday that progress on the farm bill is being complicated by senators’ attempts to turn it into a tax bill and by the difficulties in writing a permanent disaster program.

“But Collin Peterson, D-Minn., told the American Soybean Association he believes enough of a deal will be made by Friday to warrant an extension of the 2002 farm bill through April 15. He also told the soybean growers he has a meeting scheduled later Monday with House Agriculture Committee Republican staff and Bush administration officials. He will also be meeting Tuesday with the other Agriculture Committee principals, including Senate Agriculture Committee Chairman Tom Harkin, D-Iowa; Senate Agriculture Committee ranking member Saxby Chambliss, R-Ga.; and House Agriculture Committee ranking member Bob Goodlatte, R-Va., to try to work on the framework of a deal.

“Peterson told reporters, however, that he believes that if the Bush administration does not reach an agreement with Congress, a bill could be written so that the House could override a presidential veto.”

Mr. Hagstrom noted that, “Peterson also said the biggest problem in reaching decisions on how to divide the additional $10 billion in the bill is the permanent farm disaster program promoted by [Senate Finance Chairman Max Baucus, D-Mont.] and Senate Budget Chairman Kent Conrad, D-N.D.”

In a related item, Associated Press writer Mary Clare Jalonick reported yesterday that, “A new program designed to compensate farmers for weather-related crop losses is expected to survive congressional negotiations over multibillion-dollar farm legislation.

“Farm-state members from drought-prone states in the West and Midwest have aggressively pushed the idea, saying they can’t always depend on Congress or the White House to come up with emergency money when farmers lose everything they have due to drought or flooding.”

The AP article indicated that, “Montana Sen. Max Baucus, the Democratic chairman of the Senate Finance Committee, created the $5 billion disaster fund when his panel wrote its portion of the farm bill last year. He said Friday he has an agreement with Minnesota Rep. Collin Peterson, the Democratic chairman of the House Agriculture Committee, that at least $4.2 billion will be dedicated for the fund.

“A spokeswoman for Peterson said she could not confirm that number, and that Peterson was traveling and unavailable for comment.

“Iowa Sen. Tom Harkin, the Democratic chairman of the Senate Agriculture Committee, confirmed that the disaster fund is expected to be part of the bill, though he didn’t give a dollar amount. Harkin has opposed the idea, saying it could be vulnerable to abuse.

“‘There will be some funds for disaster in there,’ Harkin said. ‘How much that’s going to be, I don’t know.’”

Meanwhile, U.S. Secretary of Agriculture Ed Schafer appeared yesterday on Washington Journal, a public affairs program broadcast on C-SPAN.

A FarmPolicy.com audio summary featuring clips from the program is available by clicking here (MP3- six minutes).

Secretary Schafer addressed issues regarding the Farm Bill and specifically spoke about subsidy payments, nutrition programs, food costs, the Conservation Reserve Program and offered his perspective on Farm Bill timing as the March 15 extension deadline approaches.

Keith Good