Ag economist offers insight to committee on biofuels demand

Jul 29, 2013

Last week’s Renewable Fuel Standard (RFS) hearings are being called a “train wreck” from the biofuels industry, but agriculture groups are hoping that they may be reaching a turning point on the contentious subject.

While the hearing included little representation from the biofuels industry, it was well represented on the ag side.

Purdue University agricultural economist Chris Hurt testified before the congressional panel that is supposed to determine whether the law requiring production of biofuels should be altered to meet changing conditions.

Hurt explained how the Energy Independence and Security Act of 2007 has been a boon to crop producers, such as corn growers, but also has helped to drive prices for animal feed and food for people higher by requiring a significant portion of the crops go to the production of ethanol.

“This law has had some pretty large impacts on the demand for grains,” Hurt said. “In this case, it was a very rapid increase in demand mandated by law.”

Hurt gave his testimony to a panel of the House Energy and Commerce Committee that is assessing the effectiveness of the RFS.

The RFS, a 2005 provision of the Energy Policy Act, sets targets and timetables for certain biofuels to be added to the nation’s transportation fuel supply. It was expanded under the Energy Independence and Security Act two years later, setting requirements that 16.55 billion gallons of biofuels be produced in 2013 and 36 billion by 2022. Hurt estimates that 38 percent of the 2013 corn crop will go toward ethanol production.

To meet the federally mandated production levels, U.S. agriculture put more acreage into growing corn, and the biofuels industry built the necessary production plants to process it into ethanol, he said.

“That was not done without some costs,” Hurt said. Shifting large amounts of acreage into corn at a time between 2005 and 2010 when the Chinese were also drastically increasing their purchases of soybeans meant less acreage for crops other than corn or beans.

“If the Congress saw what was developing with the Chinese back then, it might not have ramped up the Renewable Fuel Standard requirements so rapidly,” he said.

Among the congressional subcommittee’s considerations must be how agriculture will meet mandated production levels of ethanol in view of the slow pace in the development of cellulosic biofuels, such as those from miscanthus or crop and forest residue, Hurt said. He noted that a requirement for 1 billion gallons of cellulosic biofuels to be produced this year has been lowered to only 14 million gallons, in line with actual production. Still, a requirement of 16 billion gallons of cellulosic biofuels by 2022 remains in the RFS mandate.

“That is not likely to happen,” Hurt said.

“The Renewable Fuel Standard is one of the most important laws that has been driving U.S. agriculture. Thus, any changes to that law could have large impacts on the future of the sector.”

While the hearing was supposed to have representation from those both for and against, several biofuels representatives say there was little to no representation from that side of the industry but they responded in full force after its conclusion.

“Today’s testimony by USDA Chief Economist Joseph Glauber validates what we in the biofuels industry have been saying since the RFS was enacted—that the production of biofuels does not have any substantive correlation with the rising cost of food prices,” said Tom Buis, CEO of Growth Energy.

“If the committee is truly interested in the culprits behind rising food prices, they should look no further than oil companies. Today’s testimony comes on the heels of a recent study by the World Bank, which outlined how crude oil prices are responsible for 50 percent of the increase in food prices since 2004,” Buis continued. “Additionally, large food corporations, like oil companies, are recording near record profits while trying to use the RFS as a scapegoat as they increase prices at their own discretion at the pump and grocery store at the expense of the American consumer.”

Brooke Coleman, executive director of the Advanced Ethanol Coalition (AEC), said that several times during the hearing, members of the committee said “times have changed” since the passage of the RFS in 2007, and that the U.S. no longer has a foreign oil dependence problem.

“This idea that we have somehow kicked our addiction to foreign oil is not based on fact,” said Coleman. “Last year’s 14 percent increase in domestic oil production is good for energy security, but it’s a drop in the bucket when it comes to foreign oil dependence. The United States provides about 8 percent of the world’s oil, we are again on pace to spend more than $400 billion on foreign oil in 2013, imports from the Persian Gulf and Saudi Arabia were up (not down) in 2012, and this supposed oil renaissance has done nothing to reduce the price of a gallon of gasoline for American consumers or the U.S. economy as a whole,” added Coleman.

AEC also believes that the current trends are not predicted to continue in the long term. “Tight oil reserves in places like the Bakken are simply not robust enough to fundamentally change our situation.

The estimated 4.3 billion barrels of recoverable tight oil from the Bakken, according to the U.S. Geological Survey, is less than one year’s worth of crude oil consumption by U.S. refineries. That’s why U.S. foreign oil dependence is expected to start increasing again within three-five years,” said Coleman.

“Times will change when we introduce competition for the oil industry,” Coleman said, “and that’s exactly what the RFS is doing.”

Despite some in the biofuels feeling less than represented at the hearing, the committee believes both sides were well represented.

The members heard testimony from three panels of witnesses representing fuel users, developers, and representatives from the agricultural and environmental communities. The committee said the panelists discussed a range of topics, including the RFS’s potential effect on fuel and food prices, blend wall and compatibility issues, and impacts on the nation’s agricultural sector and the environment.

The RFS was last revised in 2007, and in the years since, the nation’s energy landscape has transformed dramatically. As a result of these changes in the nation’s energy mix and other unforeseen circumstances, several implementation challenges have emerged. In some respects, the RFS has unfolded as expected, but in others it has not. Committee leaders expressed a commitment to working toward addressing these challenges.

Energy and Power Subcommittee Chairman Ed Whitfield, R-KY, said, “Many businesses and many jobs are at stake—from corn farmer to refinery worker to gas station employee to lawnmower maker to ethanol plant worker. And, just as important, the interests of consumers are directly impacted by the RFS. The end goal of this process is an RFS that works as best as possible for everyone.”

Full Committee Chairman Fred Upton, R-MI, added, “In my view, the current system cannot stand. I hope we can start a discussion that considers a host of potential modifications and updates to the RFS, with the end goal being a system that works best for the American people. I am absolutely committed to ensuring we deliver workable reforms.” — Traci Eatherton, WLJ Editor