KANSAS CITY — The rapid increase in U.S. ethanol production is setting the stage for significant changes in crop area, grain transportation and storage patterns, livestock and poultry production, and potentially food prices as early as this year and certainly in the years ahead.
While some impact of the increase, such as higher corn prices, already is evident, many consequences, such as the effects on food prices, are more a matter of speculation. Several studies released late last year shed additional light and provided thought-provoking projections on the rapidly emerging shift in agricultural production to food, feed and fuel and away from just food and feed.
In the United States a surge in production of ethanol, and to a lesser extent biodiesel, was ignited by the Energy Policy Act of 2005, the banning of methyl tertiarx ether in 25 states, President George Bush’s Advanced Energy Initiative and high profits for ethanol producers early in 2006.
U.S. ethanol production was expected to reach 5 billion gallons in 2006, up more than 25% from 2005, according to data from the Renewable Fuels Association (R.F.A.). Demand for ethanol in 2006 was forecast to "greatly exceed" 5 billion gallons, more than 1 billion gallons over the Renewable Fuel Standard (R.F.S.) requirement of 4 billion gallons for 2006, the R.F.A. said.
"The rapid growth in ethanol demand seen in 2006 was mirrored by our industry’s commitment to increasing ethanol production," said Robert Dinneen, president of the R.F.A. "The result has been one of the most dynamic and fastgrowing energy sectors anywhere in the world."
Ethanol production capacity from the 110 facilities in 19 states at the end of 2006 was 5.3 billion gallons, up 1 billion gallons from the beginning of 2006, the R.F.A. said. The 63 ethanol plants under construction with 8 others expanding will add 5.4 billion gallons of new capacity in the next 18 months, bringing total capacity to 10.7 billion gallons. In 1978 there was one plant producing fuel grade ethanol in the Midwest.
Preliminary results of one study indicate corn priced at $4.05 a bu and crude oil at $60 a barrel, with no changes in government policy, would result in ethanol production of 31.5 billion gallons, or 20% of U.S. gasoline use, by 2015. Such production would require a 46% increase in corn production, a 22% increase in planted corn area, a 14% cut in soybean area, a 3% decrease in wheat area, a 10% to 15% decrease in pork production, and a reduction in poultry production, among other major industry changes.
But those numbers should be viewed as the "logical end point to the current incentives to invest in corn-based ethanol plants" and not "as a prediction of what will eventually materialize," according to the study, titled "The Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed and Livestock Sectors: A Preliminary Assessment," from the Center for Agricultural and Rural Development (CARD) at Iowa State University.
To reach the upward ethanol production "limit" of nearly 32 billion gallons discussed in the CARD study would require production capacity nearly six times the current level of 5.3 billion gallons, five times as much corn used for ethanol (11.1 billion bus versus 2.15 billion now) and ultimately result in the U.S. becoming a net corn importer rather than the world’s largest exporter.
While those changes seem dramatic or even unlikely to some, corn prices have been at 10-year highs, and during harvest cash prices exceeded U.S. Department of Agriculture Loan Deficiency Payment target prices for the first time in years. March 2007 corn futures at the Chicago Board of Trade closed out 2006 at $3.90¼ a bu, with July at $4.02½. At the end of 2005, March 2006 corn closed at $2.15¾ a bu and July at $2.32. January crude oil futures at the New York Mercantile Exchange closed Jan. 29 at $61.05 a barrel, up 1c from a year earlier. The U.S. Department of Energy estimated crude oil prices averaged about $66 a barrel in 2006 and forecast a $65 average for 2007.
While the CARD study examined what could be the upper limits of ethanol produced from grain, another recent study, also from Iowa State University, examined the current situation and revealed major shifts already under way. That study, titled "Sourcing Corn for Ethanol: Impacts of Local Processing," was sponsored by the Iowa Grain Quality Initiative and involved interviews with representatives from 20 of the state’s 27 ethanol facilities that produce nearly 1.5 billion gallons of ethanol, roughly equal to Iowa’s total gasoline use of 1.6 billion gallons. In addition, 11 new plants were under construction and six were expanding in the state. Combined, the existing and new plants are expected to use 1.6 billion bus of corn annually, or 80% of Iowa’s 2 billion bus crop in 2006.
"The potentially huge demand for corn by ethanol processors is changing producers’ routines of storing, selling and managing harvested corn as ethanol plant managers seek to access the majority of their corn supply directly from farmers," the study concluded.
Iowa has 1.6 billion bus of on-farm storage capacity and 1.1 billion bus of commercial storage. But access to about 1 billion bus of "mobile storage" in trains, barges, terminal and export elevators would be lost by the need to retain corn locally, where ethanol processors require a steady flow of locally originated corn throughout the year, the study said. The ethanol plants had on-site storage for only about 30 million bus of corn.
The study also noted the rapid growth of local processing was fostering competition for corn between livestock feeders, exporters and ethanol plants. While less corn was available locally as livestock feed, there was a vast increase in supply of distillers grains, a byproduct of ethanol production.
The change to local processing has resulted in a change in transportation needs, as well, the study said. The vast majority of ethanol plants in Iowa receive grain only by truck, while 65% of ethanol is shipped from the plants by rail to the East and West coasts and to the South.
Yet another study, this from the Council for Agricultural Science and Technology (CAST), projected production capacity will grow to 7 billion gallons by January 2008 and continue to rise after that, but ultimately "the rate of expansion depends largely on the continued profitability of ethanol production."
Major factors affecting profitability include the price of ethanol, cost of feedstocks (usually corn), and boiler fuel (usually natural gas). Ethanol prices primarily depend on gasoline prices, CAST said. When petroleum is $60 a barrel, wholesale gasoline is expected to be $2.07 a gallon. After reaching historic highs in the summer of 2006, ethanol prices should closely track petroleum prices for the foreseeable future, CAST said.
CAST noted U.S. corn production increased to 11.1 billion bus in 2005 from 4.2 billion bus in 1966, with 80% of the increase due to yield and 20% due to increased planted area.
"The rapid expansion of ethanol production currently under way will require greater amounts of corn than previously predicted before the recent, abrupt rise in oil prices," CAST said. U.S. capacity of 10 billion gallons is likely by 2010-11, CAST said, easily surpassing the 7.5 billion gallons by 2012 required under the R.F.S. but short of the "upper limit" in the CARD study.
Since a bushel of corn yields 2.8 to 3 gallons of ethanol, each billion-gallon production increase requires about 350 million additional bushels of corn, or 2.3 million more acres at current yields.
"The rate of gain in corn yields ultimately will determine the ceiling on grain-ethanol production capacity that can be sustained without causing global food deficits, high corn prices and pressure to expand corn production onto marginal land," the CAST study said.
Because grain-based ethanol currently is the major source of biofuel for the United States, the CAST study predicted the magnitude of increase in grain-ethanol production is expected to have a significant impact on commodity prices, agricultural profitability and global food security.
While the marketplace already is anticipating competitive demand for corn, as reflected in higher futures prices, the first real evidence of a shift to grain for fuel will come March 30 when the U.S.D.A. reports farmers’ initial planting intensions for 2007 crops.