Editor’s note: The following opinion editorial was submitted by the author in response to recent articles written about U.S. ethanol production and ethanol mandates.
Ok, I admit the title of this piece is a paraphrase of the title of an article written by Robert White printed in Progressive Dairyman (Issue 3, Feb 12, 2008, page 34), “Is ethanol the solution or the scapegoat? First, I have added one very important word – mandates. It’s a word Mr. White apparently prefers to avoid because in several readings of his article I cannot find a single use of the word. Second, I have changed the word scapegoat into plain “goat.”
Ethanol is not a solution, and it is not unfairly blamed.
The most important thing to grasp in the whole ethanol story is that Congress in its wisdom has decided that a fixed amount of corn produced in this country must be converted to ethanol and literally burned. That is the mandate. The law that sets this up is the Energy Independence and Security Act (EISA) passed by Congress in December 2007. This all started with the more modest Energy Act of 2002, but it is the dramatic increase in mandates of EISA that are causing the heartburn. Thus, by act of Congress we must (as in ‘it is mandated’) use 9 billion gallons of corn-based ethanol in the nation’s gasoline in 2008.
It takes 3.6 billion bushels of corn to make that much ethanol. That is equal to nearly 11,000 truckloads of corn per day. In 2007, this country produced an all-time record crop of 13.1 billion bushels of corn. On the off chance that we can produce the same amount in 2008 (on less acres of corn), ethanol production will consume more than 25 percent of the expected corn crop. Worse yet, the mandates go up each year until they hit 15 billion gallons of ethanol, at which time at least 40 percent of the corn crop will be “burned.” The mandated total corn use in 2009 is 4.2 billion bushels.
Battle for acres
The second most important thing to understand is the “battle for acres.” It is so simple and straightforward. EISA in effect reduces the supply of corn available to the market, but other uses still exist, such as food and feed, for example. It is necessary to convince corn farmers to plant more acres. The way this always happens is futures prices have to surge to “buy” the added acres.
That happened in a big way, but the acres were taken from soybeans, wheat and other crops. Any observer of the agricultural sector knows what has been happening to prices in the grain markets since the start of mandated ethanol usage. The reach of the “battle for acres” has already been noticed in any area that has land that could be converted to any of the three big grains – corn, soybeans or wheat. That, of course, is nearly everywhere. The food inflation spiral has now started in earnest.
And the third most critical point is that corn-based ethanol is nearly useless in earning this country energy independence. Mr. White reports in his article that ethanol replaces gasoline that would require the use of 600,000 barrels of oil a day. He chooses not to mention that the energy costs of making corn (including the production of the corn, the transport of the corn to the ethanol plant, the conversion of corn to ethanol and the delivery of the ethanol to the plant where it is mixed with gasoline) uses at a minimum 450,000 barrels of oil a day. He also chooses not to mention that ethanol has only 70 percent of the energy content of gasoline. That being the case, the 600,000 barrels of ethanol provided each day would have the energy equivalent of 450,000 barrels of oil. (You will be a bit amused to know that the 600,000 barrels of oil per day works out to 9 billion gallons of oil. If that number looks familiar it is because it is this year’s mandated usage of ethanol, so it is clear this number was not adjusted for energy content.) The production of corn ethanol is a zero-sum (or worse) solution to the energy crisis and on a net basis contributes nothing to energy independence.
Economics of mandates
I did not sleep during economics class and, like Mr. White, do understand that “we live in a global economy where an extensive assortment of complex interrelated factors drive supply and demand and ultimately the price of goods and services (i.e., the price of feed grains.) What was not taught in economics class was the economics of mandates – if there is such a thing – since all that our ethanol mandate does is reduce supply.
All the normal “complex interrelated factors,” some of which are discussed in the seven points in his opinion, happen after the thing that has to happen happens – a mandate. Congress has created the equivalent of a poor corn crop each and every year during which the mandate is in place. Reductions in supplies nearly always cause increases in prices, and these reductions are part of the normal impact of supply and demand.
The normal causes of reductions in supply often relate to weather (floods, droughts, tornados, etc. – both here and worldwide) and generally have an impact over a relatively short period of time. As an aside, just contemplate for a moment what would happen if some natural disaster happened on top of the mandate. A mandate like the one in the EISA is a long-term reduction of supply, and it’s a reduction that gets bigger each year. It already is a disaster and will be increasingly so.
On this topic, Mr. White attempts to divert your attention by comparing the impact of corn on food prices to the impact of oil on food prices. Because of the mandate-caused “battle for acres,” all food prices are going up – rapidly. Not just corn as he implies, but all things that are grown on land. It is the cumulative impact that counts. So I will agree with Mr. White that ethanol is not “the factor behind increased feed and grain prices affecting the dairy industry.” But the ethanol mandates are far and away the most important reason prices for feed grains are at or near all-time highs, and climbing.
About one-third of the volume of corn that goes into an ethanol plant is available at the end of the process to use as a cattle feed. It is not a terrible feed, but it is not as good as corn. After you think about this statement I am sure all livestock feeders would agree that they will be far better off having 3 tons of corn available at regular cost than to have 1 ton of distillers grains at high prices.
Dairy industry on a collision course
The trend line of milk production cost increases is on a course to meet the reduced income because of falling world prices for milk products. The outlook for beef, pork and chicken industries is no better. These four industries are huge consumers of feed grains.
The U.S. dairyman has been extremely lucky to have had the increase in world demand for milk proteins push prices up to record levels just as the mandates were sucking corn out of our system. In some senses, this may have been bad luck because for the past year our income has masked the onslaught of price increases. We come a bit late to the game now that we notice the coming train wreck.
I will leave you with a thought expressed recently by a dairyman friend: “We frequently face a ‘bad period’ where we lose from $1 to $1.50 per hundredweight (cwt), but the future looks like a ‘bad period’ will be defined as losses in the range of $5 per cwt.” He then paused and added, “I’m not sure any of us have a good-enough relationship with our banker to get six-figure credit extensions each month." PD
Bill Van Dam
CEO of the Alliance of Western Milk Producers