Distillery Demand for Grain To Fuel Cars Vastly Understated

Earth Policy Institute
Eco-Economy Update
Embargoed for Release
12 pm EST, January 4, 2007

DISTILLERY DEMAND FOR GRAIN TO FUEL CARS VASTLY UNDERSTATED

World May Be Facing Highest Grain Prices in History

Lester R. Brown

www.earthpolicy.org/Updates/2007/Update63.htm

Investment in fuel ethanol distilleries has soared since the late-2005 oil price hikes, but data collection in this fast-changing sector has fallen behind. Because of inadequate data collection on the number of new plants under construction, the quantity of grain that will be needed for fuel ethanol distilleries has been vastly understated. Farmers, feeders, food processors, ethanol investors, and grain-importing countries are basing decisions on incomplete data.

The U.S. Department of Agriculture (USDA) projects that distilleries will require only 60 million tons of corn from the 2008 harvest. But here at the Earth Policy Institute (EPI), we estimate that distilleries will need 139 million tons–more than twice as much. If the EPI estimate is at all close to the mark, the emerging competition between cars and people for grain will likely drive world grain prices to levels never seen before. he key questions are: How high will grain prices rise? When will the crunch come? And what will be the worldwide effect of rising food prices?

One reason for the low USDA projection is that it was released in February 2006, well before the effect of surging oil prices on investment in fuel ethanol distilleries was fully apparent. Beyond this, USDA relies heavily on the Renewable Fuels Association (RFA), a trade group, for data on ethanol distilleries under construction, but the RFA data have lagged behind movement in the industry.

We drew on four firms that collect and publish data on U.S. ethanol distilleries under construction. RFA is the one most frequently cited. The other three firms are Europe-based F.O. Licht, the publisher of World Ethanol and Biofuels Report; BBI International, which publishes Ethanol Producer Magazine; and the American Coalition for Ethanol (ACE), publisher of Ethanol Today.

Unfortunately, the lists of plants under construction maintained by RFA, BBI, and ACE are not complete. Each contains some plants that are not on the other lists. Drawing on these three lists and on biweekly reports from F.O. Licht, EPI has compiled a more complete master list. For example, while we show 79 plants under construction, RFA lists 62 plants. (We welcome any information that will improve this list, which can be viewed at www.earthpolicy.org/Updates/2007/Update63_data.htm.)

According to the EPI compilation, the 116 plants in production on December 31, 2006, were using 53 million tons of grain per year, while the 79 plants under construction–mostly larger facilities–will use 51 million tons of grain when they come online. Expansions of 11 existing plants will use another 8 million tons of grain (1 ton of corn = 39.4 bushels = 110 gallons of ethanol).

In addition, easily 200 ethanol plants were in the planning stage at the end of 2006. If these translate into construction starts between January 1 and June 30, 2007, at the same rate that plants did during the final six months of 2006, then an additional 3 billion gallons of capacity requiring 27 million more tons of grain will likely come online by September 1, 2008, the start of the 2008 harvest year. This raises the corn needed for distilleries to 139 million tons, half the 2008 harvest projected by USDA. This would yield nearly 15 billion gallons of ethanol, satisfying 6 percent of U.S. auto fuel needs. (And this estimate does not include any plants started after June 30, 2007, that would be finished in time to draw on the 2008 harvest.)

This unprecedented diversion of the world’s leading grain crop to the production of fuel will affect food prices everywhere. As the world corn price rises, so too do those of wheat and rice, both because of consumer substitution among grains and because the crops compete for land. Both corn and wheat futures were already trading at 10-year highs in late 2006.

The U.S. corn crop, accounting for 40 percent of the global harvest and supplying 70 percent of the world’s corn exports, looms large in the world food economy. Annual U.S. corn exports of some 55 million tons account for nearly one fourth of world grain exports. The corn harvest of Iowa alone, which edges out Illinois as the leading producer, exceeds the entire grain harvest of Canada. Substantially reducing this export flow would send shock waves throughout the world economy.

Robert Wisner, Iowa State University economist, reports that Iowa’s demand for corn from processing plants that were on line, expanding, under construction, or being planned as of late 2006 totaled 2.7 billion bushels. Yet even in a good year the state harvests only 2.2 billion bushels. As distilleries compete with feeders for grain, Iowa could become a corn importer.

With corn supplies tightening fast, rising prices will affect not only products made directly from corn, such as breakfast cereals, but also those produced using corn, including milk, eggs, cheese, butter, poultry, pork, beef, yogurt, and ice cream. The risk is that soaring food prices could generate a consumer backlash against the fuel ethanol industry.

Fuel ethanol proponents point out, and rightly so, that the use of corn to produce ethanol is not a total loss to the food economy because 30 percent of the corn is recovered in distillers dried grains that can be fed to beef and dairy cattle, pigs, and chickens, though only in limited amounts. They also argue that the U.S. distillery demand for corn can be met by expanding land in corn, mostly at the expense of soybeans, and by raising yields. While it is true that the corn crop can be expanded, there is no precedent for growth on the scale needed. And this soaring demand for corn comes when world grain production has fallen below consumption in six of the last seven years, dropping grain stocks to their lowest level in 34 years.

From an agricultural vantage point, the automotive demand for fuel is insatiable. The grain it takes to fill a 25-gallon tank with ethanol just once will feed one person for a whole year. Converting the entire U.S. grain harvest to ethanol would satisfy only 16 percent of U.S. auto fuel needs.

The competition for grain between the world’s 800 million motorists who want to maintain their mobility and its 2 billion poorest people who are simply trying to survive is emerging as an epic issue. Soaring food prices could lead to urban food riots in scores of lower-income countries that rely on grain imports, such as Indonesia, Egypt, Algeria, Nigeria, and Mexico. The resulting political instability could in turn disrupt global economic progress, directly affecting all countries. It is not only food prices that are at stake, but trends in the Nikkei Index and the Dow Jones 500 as well.

There are alternatives to creating a crop-based automotive fuel economy. The equivalent of the 2 percent of U.S. automotive fuel supplies now coming from ethanol could be achieved several times over, and at a fraction of the cost, by raising auto fuel efficiency standards by 20 percent.

If we shift to gas-electric hybrid plug-in cars over the next decade, we could be doing short-distance driving, such as the daily commute or grocery shopping, with electricity. If we then invested in thousands of wind farms to feed cheap electricity into the grid, U.S. cars could run primarily on wind energy–and at the gasoline equivalent of less than $1 a gallon. The stage is set for a crash program to help Detroit switch to gas-electric hybrid plug-in cars.

It is time for a moratorium on the licensing of new distilleries, a time-out, while we catch our breath and decide how much corn can be used for ethanol without dramatically raising food prices. The policy goal should be to use just enough fuel ethanol to support corn prices and farm incomes but not so much that it disrupts the world food economy. Meanwhile, a much greater effort is needed to produce ethanol from cellulosic sources such as switchgrass, a feedstock that is not used for food.

The world desperately needs a strategy to deal with the emerging food-fuel battle. As the leading grain producer, grain exporter, and ethanol producer, the United States is in the driver’s seat. We need to make sure that in trying to solve one problem–our dependence on imported oil–we do not create a far more serious one: chaos in the world food economy.

# # #

Lester R. Brown is President of the Earth Policy Institute and author of Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble.

For additional information on this topic see:
www.earthpolicy.org/Updates/2006/Update60.htm & www.earthpolicy.org/Updates/2006/Update55.htm

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E-mail: rjk (at) earthpolicy.org

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E-mail: jlarsen (at) earthpolicy.org

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Web: www.earthpolicy.org

10 thoughts on “Distillery Demand for Grain To Fuel Cars Vastly Understated”

  1. They also argue that the U.S. distillery demand for corn can be met by expanding land in corn,

    insane if for no other reason that monocultures are really fragile ecosystems.

    mostly at the expense of soybeans,

    hmmm less soybeans means less tofu. maybe more corn fields has some benefit… 🙂

    country mouse

  2. Robert Wisner, Iowa State University economist, reports that Iowa’s demand for corn from processing plants that were on line, expanding, under construction, or being planned as of late 2006 totaled 2.7 billion bushels. Yet even in a good year the state harvests only 2.2 billion bushels. As distilleries compete with feeders for grain, Iowa could become a corn importer.

    I have been corresponding with a couple of people who run pro-ethanol websites about this. Unfortunately, the ethanol evangelists are in complete denial.

    The dream of a big pot of money under that ethanol rainbow if only they can get their ethanol plant built before the farmer’s co-op in the neighboring county is making them irrational.

    Many of the farmer’s co-ops investing in ethanol plants across the Corn Belt are going to be sorely disapointed when they find out there will not be enough corn for all of them.

    I read an item in a Nebraska newspaper not long ago that a new ethanol plant being built there was planning to import Iowa corn in case of a shortfall in Nebraska. (The shortfall in Nebraska will be inevitable as they drain the Ogallala Aquifer.)

    The ethanol evangelists simply have no concept of (or concern about) the amount of natural resources all of their ethanol plants and industrial corn farms will consume — from natural gas to liquid fossil fuels to water.

    And what will be the benefit of consuming those resources?

    A few ethanol plant operators will get rich (some even very rich I’m sure), but the ethanol they produce will mean nothing in terms of solving our national energy crisis, all while driving up the price of food as Lester Brown points out.

    The ethanol they produce will do nothing that we couldn’t accomplish if we could just convince people to drive less while compelling Detroit to increase the CAFE by 10-15%.

    Regards,

    Gary Dikkers

  3. Robert – have you read the Jan 2007 Scientific American article on ethanol? Your old friend Michael Wang is quoted. You can get an excerpt on the Sciam.com website. Or go to the company homepage and click on “Conversation on Energy” for the full color article. It has very nice illustrations. My favorite quote concerned a group promoting renewables. They couldn’t say how they were going to reach their goals. “There was little desire to blemish the concept with arithmetic.”

  4. Robert,
    I see this playing out very differently: once corn prices start to rise (OOPS it already started). Once corn prices rise above a certain level, ethanol would simply become to expensive compared to gasoline. Remember, unlike food, there is (still) an easy alternative for corn ethanol: fossil fuels. So, when it gets to food vs. fuel, food will win the fight. Unfortunately, this will also hurt the poor disproportionately. Eventually all these new ethanol plants will go bankrupt. Of course, not without screaming that the Feds should bail them out with a few more temporary subsidies.

    Converting the entire U.S. grain harvest to ethanol would satisfy only 16 percent of U.S. auto fuel needs.
    The real number is much lower than that, I believe: In 2005, it is estimated that about 14% of the US corn harvest (about 10 billion bushels) was used to produce 4 billion gallons of ethanol, or 261,000 bbl/d. After factoring in that a barrel of ethanol has ~2/3 of the energy of a barrel of oil, that means it could replace ~174,000 bbl/d of oil. In other words, it is enough to replace ~0.87% of the US crude demand (~20 million bbl/d).

    So 14% of the corn harvest yield enough ethanol to replace 0.87% of our oil consumption (addiction?). So 100% of the corn harvest could replace all of 6.2% (=0.87/14*100) of our oil use.

    That will show ’em Arabs!

  5. Once corn prices rise above a certain level, ethanol would simply become to expensive compared to gasoline.

    The problem, though, is that the ethanol is mandated. I do expect it to be expensive, and to remain expensive. But our mandate is scheduled to almost double to 7.5 million gallons by 2012.

  6. Robert,
    You need to check the numbers: According to Lester Brown, the 2008 harvest would produce ~15.3 billion gallons of ethanol – 139 million tons of corn @ 110 gallons ethanol per ton of corn. That is more than double the mandate. And note that’s billion with a b.

    So who is going to buy the other half of the expensive ethanol?

  7. Robert,

    I think you have to keep in mind that, from an historical point of view, corn prices are (or were up until recently) insanely low.

    Prices per bushel were the same as they were 30 years ago, so in effect they were about 75% lower in real terms!

    There’s lots of land not being farmed because prices were so low.

    OTOH, we may be in for a real commodities roller-coaster ride, as ethanol corn demand jumps past production much faster than production can be increased. I suspect a lot of ethanol plants will lose money even as farmers wish they had doubled their acreage. Let’s just hope the ethanol plants don’t go out of business due to temporarily high prices, leaving corn farmers the following year with another surplus.

    Farming has weird and terrible price cycles.

  8. You need to check the numbers: According to Lester Brown, the 2008 harvest would produce ~15.3 billion gallons of ethanol – 139 million tons of corn @ 110 gallons ethanol per ton of corn. That is more than double the mandate. And note that’s billion with a b.

    I get 12.4 billion gallons from the 139 million tons. A bushel has 56 lbs, and the average is 2.5 gallons a bushel.

    But, you are correct that this is greater than the mandate. The 2007 mandate is 4.7 billion gallons. The mandate rises to 7.5 billion gallons in 2012.

    But, ethanol producers are already lobbying to have the mandate increased. You are correct that if it isn’t, there will be a glut of ethanol and a lot of producers will probably go out of business. But never underestimate the power of the corn/ethanol lobby. If producers start to lose money, the mandate will go up.

    The other thing I would point out is that the demand for corn will continue to increase over present values. Demand from ethanol producers will continue to grow, and this is driving high prices now. Unless farmers can bring a lot of new production online, then corn prices will remain high even if ethanol prices start to drop.

  9. Robert,
    You are right about the vice-like grip that the ag-lobby seem to have on Washington. History suggests they will play this game to their full advantage.

    That said, I think this is where the rest of the country will call their bluff. As you point out, increasing demand for corn to make ethanol is already beginning to raise corn prices. For now, most people are just happy for the farmers.

    That will change when we reach the point where corn prices reach new record levels and ethanol is substantially more expensive than gasoline. I don’t see any politician trying to convince the American people that they should pay more for gasoline so that corn prices can go from the stratosphere to orbit.

    As hard as recent events (pick your event) make it to believe, at some point reality catches up with you…

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