Biofuels at center of debate as commodity costs rise

by Ron Sterk
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The debate over growing crops for food or fuel heated up in recent weeks as prices for gasoline, diesel fuel and some commodities, especially rice, soared to record levels and riots erupted over food prices and fears of shortages in some developing countries.

Corn and crude oil futures and retail gasoline prices set record highs last week while wheat, rice, soybeans and diesel fuel were off record highs set a few days to a few weeks ago but remained historically high.

The debate stems from the Renewable Fuels Standard (R.F.S.) mandated in the Energy Policy Act of 2005 to increase to 7.5 billion gallons by 2012. Then centered on the use of corn for ethanol, the debate has broadened to include soybeans (and other oilseeds such as rapeseed in Europe) used in the manufacture of biodiesel. But the issue concerns most crops vying for a limited number of acres.

The players in the debate have changed little over time. Opponents include the United Nations, most livestock, meat and poultry associations, producers and processors, many politicians from major livestock and crude oil states and others. Proponents include President George W. Bush, most grain and oilseed associations and farmers, politicians from major crop producing states, the respective lobbying groups for ethanol and biodiesel and others.

Both sides cite numerous statistics and studies mostly from respected sources to support their side of the debate.

Ethanol blamed for rising prices

As recent record high grain and oilseed prices began trickling down to consumers in the form of higher food prices, a groundswell of opposition erupted bashing biofuels and grain-based ethanol in particular, with calls for a moratorium on production and at the least a downward revision to the R.F.S., which was expanded in the Energy Independence and Security Act of 2007.

A revision to the 51c-a-gallon ethanol federal tax credit was proposed on April 25 as part of the yet unfinished 2007 farm bill. The proposal called for a 6c reduction in the credit in the first year after ethanol production reaches the current 7.5 billion gallon R.F.S., which should occur this year. At the same time a $1.01 per gallon tax credit was proposed for cellulosic ethanol.

Also proposed was a cut to 45c of the controversial 54c-a-gallon ethanol import tariff. That tariff has been strongly criticized by Brazil, the world’s largest ethanol exporter, which would like to export more of its sugar-based ethanol to the United States.

About two dozen Republican senators, including presidential candidate John McCain of Arizona, on May 2 asked the Environmental Protection Agency to waive or restructure the R.F.S. The E.P.A. has the responsibility to implement the R.F.S. as well as the authority to adjust or waive it if the E.P.A. determines the R.F.S. will "severely harm" the economy or environment.

Texas governor Rick Perry on April 25 asked the E.P.A. to reduce the R.F.S. for ethanol made from grain by 50% as the quickest way to ease rising food prices before "lasting damage" was done. Texas is the largest gasoline producing and cattle feeding state, both of which would be expected to benefit from reduced use of corn to make ethanol. Other states were considering similar actions while some already had decided against such a move.

Meat and poultry processors and livestock producers have cited high corn prices for sinking financial results. Tyson Foods, Inc., Springdale, Ark., the nation’s largest meat processor, said on April 28 its costs for corn and soybean meal doubled to $2 billion since 2006 and called on Congress to "put an end to our misguided ethanol policy now."

In reporting wider second-quarter losses, Pilgrim’s Pride Corp., Pittsburg, Texas, the nation’s largest chicken producer, blamed the government’s "deeply flawed" policy of subsidizing the use of corn to produce ethanol.

The United Nations has been one of the harshest critics of using food crops to produce biofuels, to the point of criminalizing the United States and the European Union for their biofuels policies. Jean Ziegler, U.N. special rapporteur on the right to food, said in April that fuel policies pursued by the United States and the European Union were "one of the main causes of the current worldwide food crises" because the United States used "a third" of its corn crop to create biofuels while the European Union plans to have 10% of its petrol supplied by biofuels.

Mr. Ziegler called for a five-year moratorium on the production of biofuels and for new financial regulations to prevent speculation.


Ethanol backers cite many factors

Senator Tom Harkin of Iowa, the largest corn producing state in the United States, countered on May 5 saying, "To single out increased biofuels production and use the United States, European Union and other countries as the chief cause of higher world food prices is an over-simplification of the problem. Numerous factors are contributing to this increase in prices: a strong demand for food imports in Asian countries such as China and India, abetted by the weak U.S. dollar, high energy costs and poor harvests over the last few years in key producing countries such as Australia and the European Union." Mr. Harkin also is the chairman of the Senate Agriculture committee.

Other proponents of biofuels have echoed Mr. Harkin’s conclusions, with several focusing on record high energy prices as the primary contributor to rising food prices.

"Recently, ethanol has received harsh criticism for allegedly driving up the price of corn and contributing to a rise in food prices," Bob Dinneen, president and c.e.o. of the Renewable Fuels Association (R.F.A.) said at a hearing on May 6 about the R.F.S. before a subcommittee of the House Energy committee. "However, the evidence does not support that conclusion. In fact, oil prices have twice the impact on rising consumer food prices than does the price of corn."

Mr. Dinneen also said a 50% retraction of the R.F.S. (4.5 billion gallons in 2008) as requested by Texas initially would boost gasoline prices as much as 31%. The R.F.A. is the ethanol industry’s major lobbying group.

President Bush, a strong proponent of alternative fuels for energy security, recently affirmed his support after severe criticism leveled at the policy. He blamed soaring energy prices as the main factor driving food prices higher, which in turn supports his push for less dependence on foreign oil.

And even though profits have been under pressure in its corn processing business due to rising corn and fuel prices, Archer Daniels Midland Co. remains a staunch supporter of ethanol.

"Biofuels are really a real solution to real problems," said Patricia Woertz, c.e.o. at ADM. "Retreat from biofuels is wrong. It won’t fill anybody’s stomach and won’t fill any gas tanks."

Corn-based ethanol ‘capped’ by 2015

The Energy Independence and Security Act of 2007 signed by President Bush last December mandated an R.F.S. of 36 billion gallons by 2022 of which 22 billion gallons would be "advanced" biofuels such as cellulosic ethanol and 15 billion gallons could be "conventional" biofuels made from grains or oilseeds.

While the R.F.S. mandate provides a potential ceiling for corn-based ethanol production of 15 billion gallons beginning in 2015, it would be more than double last year’s output, estimated by the R.F.A. at 6.5 billion gallons. Ethanol production capacity is expected to exceed 12 billion gallons and production to reach 9 billion gallons by the end of 2008, according to the R.F.A.

The U.S. Department of Agriculture forecasts 3,100 million bus of corn would be used to make ethanol in 2007-08, which would be 24% of the 2007 corn crop. In its long-term projections issued in February, the U.S.D.A. forecast U.S. corn production in 2015-16 to be 14,240 million bus. At about 2.8 gallons of ethanol produced from a bushel of corn, it would take roughly 5,350 million bus, or 38% of projected production, to reach the 15-billion-gallon ethanol target.

U.S.D.A. data show that use of corn for food and seed has held nearly constant around the 1,365 million bus average, or 13% of production, while feed use has increased modestly and exports have grown significantly in the past five years. Use of corn for ethanol has tripled during the same time (since 2002-03). The U.S.D.A. also raised projected corn use for food and feed in its long-term projections.

U.S. biodiesel production was about 500 million gallons in 2007, the National Biodiesel Board (N.B.B.) said. Actual capacity from 171 plants was 2.24 billion gallons in January, but "due to current economic conditions, the capacity utilization at many of these facilities is extremely low," the N.B.B. said. Additional construction and expansion are expected to add 1.23 billion gallons of capacity by mid-2009. About 12%, or 310 million bus, of the U.S. soybean crop was used to produce biodiesel in 2007.

One far-reaching solution to the food-or-fuel debate centers on ethanol made from products other than grain, or cellulosic ethanol, utilizing such raw material as corn stover, wheat straw and wood chips. Mr. Dinneen told the House subcommittee last week that four cellulosic ethanol plants were under construction or in pilot test in the United States.

The problem is that large-scale cellulosic ethanol "has been five years away for the last 10 years," industry sources said.

Secretary of Energy Samuel Bodman said recently the United States should start moving away from ethanol made from foodstocks to the next generation of ethanol. He said the reason cellulosic ethanol wasn’t on the market was "not because we don’t know how to make it," but rather that the process was currently "too complex and too costly."

This article can also be found in the digital edition of Food Business News, May 13, 2008, starting on Page 1. Click here to search that archive.

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