Ethanol reform needed in wake of drought

Jul 27, 2012

As a relentless, historic drought continues to blister nearly 65 percent of the nation—decimating huge volumes of U.S. corn and other crops—livestock and dairy organizations are urging Congress to either sharply curtail or entirely eliminate a federal Renewable Fuel Standard (RFS) requiring 10 percent of the nation’s gasoline supply come from ethanol.

Ethanol production now absorbs more than 40 percent of the annual U.S. corn harvest. Corn used for ethanol rose 300 percent from 2005 to 2011, increasing from 1.6 billion bushels to 5 billion bushels. Meanwhile, a forecast for the average national per-acre yield for this year’s corn harvest has been reduced from 166 bushels to 133 bushels as corn withers en masse in fields throughout the Midwest where 70 percent of nine states are gripped by an extreme heat wave.

USDA has lowered its estimate of how much corn will be used to feed livestock by 650 million bushels, or 12 per cent. It also reduced its forecast for U.S. exports by 300 million bushels.

Experts conservatively estimate the 2012 drought, the worst in 50 years, will cost the U.S. at least $12 billion, making it the most expensive drought since 1988 and surpassing the cost of 2011’s drought. The droughts in 1980 and 1988, respectively, totaled $20 billion and $40 billion in losses. Crop insurance payments made this year to drought-afflicted farmers are expected to exceed the $10.8 billion paid in 2011. Corn recently surpassed a record $8 a bushel.

Meanwhile, USDA projected July 25 that food prices in 2013 could climb by up to 4 percent as a result of this year’s drought, with beef expected to vault by up to 5 percent. That’s atop food price increases estimated at 3.5 percent this year.

Corn feed also is soaring in cost, making it more difficult for cattle ranchers and dairy operators to remain solvent and avert bank ruptcy.

With the drought eradicating tremendous volumes of corn, livestock producers say it’s urgent that the amount required to be used for ethanol be sharply reduced so more of the remaining corn can be used for food instead of fuel.

The RFS requires more than 13 billion gallons of corn-based ethanol be used this year for fuel, regardless of the corn price, prioritizing it over corn for food. It also requires 15 billion gallons of corn-based ethanol production by 2036. U.S. ethanol plants produced 33.7 million gallons a day one week recently, the lowest volume since October 2009.

The American Meat Institute, California Dairy Inc., Milk Producers Cooperative, National Cattlemen’s Beef Association, National Chicken Council, National Turkey Federation and the National Pork Producers Council have thrown their support behind a bipartisan bill sponsored by Reps. Bob Goodlatte, R-VA, and Jim Costa, D-CA, that would let the Environmental Protection Agency (EPA) drop corn ethanol production quotas by as much as 50 percent.

It would lower the RFS this year for ethanol by nearly 2 billion gallons. The legislation is opposed by ethanol producers and corn growers who profit from the mandate and higher commodity prices.

With the National Weather Service predicting drought conditions could persist through October, livestock producers fear corn supplies could be depleted by the end of the summer, with carryover stocks already low.

With conditions rapidly worsening, House Republican leaders could be prompted to act, Costa said, adding he hopes the House Energy and Commerce Subcommittee on Energy and Power will tackle the bill soon.

Goodlatte has introduced two bills to counter the RFS. One would flat out repeal the fuels standard while the other would require EPA to scale back the ethanol mandate based on the amount of corn stocks reported by USDA. Government policies have exacerbated the corn shortage, he said.

The Goodlatte/Costa bill would require changes in the RFS if the ratio of stocks-to-use for corn falls below 10 percent. If that happens, then the RFS would be cut 10 percent. If the stocks fall below 7.5 percent, then the ethanol mandate would be cut by 15 percent.

If the stocks fall below 6 percent, then the mandate would be cut 25 percent. The stocks-to-use ratio for this year’s corn crop is projected at 7.2 percent. Under Goodlatte’s bill, the RFS for the year would be cut 15 percent or about 1.95 billion gallons of ethanol.

On July 19, the livestock coalition released a report concluding that federal ethanol policy has destabilized and increased corn, soybean and wheat prices to the harm of food and fuel producers and consumers. It was authored by Dr. Thomas Elam, president of FarmEcon LLC, an Indiana agricultural and food industry consulting company.

Another corn crop reduction would be extremely devastating to the animal agriculture industry, food makers and food service providers, as well as consumers, the report says.

Elam said rising food prices are tied to the RFS through higher commodities. While the Consumer Price Index (CPI) inflation for most items has slowed since 2008, it has actually increased for food, he noted. The CPI has gone up 6.2 percent while all food costs have risen 11.3 percent. Elam said that is reflected in the costs of corn, soybean products and wheat, which also rose in cost from $41.1 billion in 2008 to $69.4 billion in 2011.

The study noted that on an energy basis, ethanol, which has only 67 percent of the net energy per gallon of gasoline, has never been priced competitively with gasoline. Because it also does not improve fuel mileage, ethanol added about $14.5 billion, or 10 cents a gallon, to motorist fuel costs in 2011, it said.

Corn represents about 80 percent of the cost of producing ethanol compared with up to 50 percent before the RFS mandate was imposed. Ethanol production costs and prices have essentially eliminated a market for ethanol blends higher than 10 percent. — Mark Mendiola, WLJ Correspondent