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Ethanol Industry Faces Challenges

Written by: Kent Thiesse

 What a difference a decade makes ! In 2000, U.S. ethanol production was less than 2 billion gallons per year, with 54 ethanol plants operating in the Country, and many of them being quite small. The estimated ethanol production for 2011 is over 13 billion gallons per year, with over 200 ethanol plants operating in 29 States, with a majority of the ethanol plants in the Midwest. Today, over 85 percent of the motor fuel sold in the U.S. contains some type of ethanol blend, and the use of ethanol has reduced the need for oil imports from OPEC and other nations by about 445 million barrels per year, which saved the U.S. about $34 billion. In 2010, it was estimated that there were over 7 million “flex-fuel” vehicles in use in the U.S., compared to virtually none a decade ago.

 In the first half of the last decade, most everyone was quite positive about the development of the ethanol industry, and there was a tremendous amount of political and public support for ethanol. Most viewed ethanol as a clean-burning fuel that could replace some of the U.S. need for Mideast oil imports, and as a fuel that could be produced domestically from corn grown in the U.S., while creating jobs and helping the rural economy.

 Several years ago, a Congressional Leader at FARMFEST stated that the rapidly developing ethanol industry was the best rural economic development tool for the Midwest. According to a recent economic analysis by Cardno ENTRIX, 70,600 people in the U.S. are employed directly in the production of ethanol, and in industries providing goods and services to the industry. As a result of the economic activity generated by U.S. ethanol production, more than 400,000 people have been able to keep their jobs or find new ones. It was also estimated that U.S. ethanol production contributed over $53 billion to the National Gross Domestic Product (GDP), added $36 billion to household incomes, and provided about $12 billion to Federal, State, and Local tax revenue.

 USDA is estimating that ethanol production will utilize slightly over 5 billion bushels of corn, or about 40 percent, of the over 13 billion bushels of corn expected to be utilized in the U.S. on 2011-12. Midwest corn farmers have benefited greatly in recent years from the increased usage of corn for ethanol production, due to a sharp increase in corn prices, with many Southern Minnesota grain farmers having near record net farm incomes in 2010. In recent months, cash corn prices have topped $6.00 per bushel, after being well below $3.00 per bushel as recently as 2005-2006. Corn prices rose above $4.00 per bushel in 2008, but dropped back to $3.00 - $4.00 per bushel until late in 2010.

 The higher corn prices have not been welcomed by all sectors of the agricultural industry. The tight corn supplies and higher corn prices have lead to much higher feed costs and tighter profit margins for livestock producers. The higher corn prices have also re-ignited the “food vs fuel” debate that was quite prevalent in 2008, when corn prices first rose above $4.00 per bushel. Many are concerned that consumer food costs will rise rapidly in the next couple of years, and some are concerned with the increasing issue of human hunger in the U.S. and around the World. Ethanol supporters feel that ethanol production is unfairly being totally blamed for the high livestock feed costs, and the rapidly increasing consumer food costs, citing the many other factors that contribute to those cost increases. The ethanol industry does produce nearly 30 million tons of dried distillers grains (DDG’s), which is a high quality livestock feed source that is fed as an alternative to corn and soybean meal. 

The public opinion of ethanol has also changed in the last decade. Even though the ethanol industry has more than accomplished many of the goals that were set out for it a decade ago, public sentiment has seemed to turn quite negative on ethanol production. Everyone from political leaders, some who formerly supported ethanol, University professors, the national news media, and local citizens are blaming ethanol for high food costs, environmental problems, damage to vehicle motors, and many other issues. While many of the claims are not factual, they have raised a lot of doubt about the future of ethanol production in the minds of many Americans.

 Many political leaders have become quite vocal in their criticism of ethanol legislation at the Federal level. Late in 2010, Congress narrowly passed a Bill extending the Volumetric Ethanol Excise Tax Credit (VEETC), the so called “blenders credit” of 45 cents per gallon for one year until the end of 2011. They also extended the 54 cent per gallon tariff on ethanol until the end of 2011, which discourages ethanol imports into the U.S. Legislation has recently been introduced in Congress to eliminate both provisions by the end of 2011, or earlier, which would save the U.S. Government nearly $5 billion per year. Some members of Congress have called for retaining some of the funding to support development of cellulosic ethanol, and other new generation biofuels. The big oil companies are scheduled to receive in excess $50 billion in Federal subsidies over the next decade.

 The U.S. Environmental Protection Agency (EPA) recently released guidelines that allow for an increase from the current 10 percent ethanol standard blends for gasoline, to 15 percent ethanol blends in gasoline. This would obviously increase demand and usage for ethanol; however, several States have asked for a waiver from the 15 percent ethanol requirement, and some members of Congress want to pass legislation repealing all mandates for ethanol blends in gasoline.

 Most observers feel that there would be very little immediate impact on U.S. ethanol production from the loss of the ethanol import tariff. Brazil is the other major producer of ethanol in the World, producing most of their ethanol from sugar cane. Currently, U.S. ethanol prices are well below Brazilian ethanol prices, due to high World sugar prices. However, that could change in years to come, if the price of Brazilian ethanol drops, or if other Countries start producing more ethanol.

 A recent study at Iowa State University estimated that elimination of the VEETC tax credit would lower average U.S. corn prices by about 7 percent over the next few years; however that would increase to a 17 percent reduction in corn prices if the mandate to blend ethanol in gasoline was also lifted. This impact would certainly be felt by farm operators and rural communities.

 A bigger philosophical question might be what the impact will be on future development of renewable fuels, if the subsidies and mandates are eliminated. Many people are very excited about producing ethanol from woodchips, switchgrass, algae, and other substances; however, most of this type of ethanol production is still in the early research and development stages, and is several years away from  commercial production. Utilizing corm cobs and corn stover is the most promising new feedstock source for ethanol production. It can be very risky to invest in new forms of renewable fuels, most of which face very high start-up costs, if there is no guarantee of a future market for the fuel. This could drive away investors and lenders from supporting future growth of renewable fuels.

 Most experts agree that neither the VEETC tax credit or the ethanol import tariff were meant to be permanent, and would probably be phased out over time. This may be a good time to phase out or to re-adjust the “blenders credit” and the tariff; however, future development and production of renewable fuels needs to be considered. As we continue to fight wars in the Middle East, and deal with erratic World oil prices, we need to continue to explore alternative fuels, and create opportunities for commercial development of viable renewable fuel alternatives. We need leaders at the Federal and State level that are “visionary” in developing a comprehensive energy plan for the U.S.