Is Ethanol Sector Growing Too Fast?

By Adam Wilmoth, The Oklahoman

Jan. 5–The rapidly growing ethanol industry soon will require about half the country’s corn harvest, which would drive up the price of corn, meat and dairy products while limiting grain exports to developing countries, an agricultural economist said Thursday.

Lester Brown, founder of the Earth Policy Institute — a Washington-based environmental think tank — said estimates by the U.S. Department of Agriculture, the Renewable Fuels Association and other groups are dramatically incorrect because they have not kept up with all the newly planned ethanol projects scheduled for completion within the next several months.

Brown called for a moratorium on new ethanol plant construction until Congress, with input from the American public, can properly research the data and make policy decisions based on the projected consequences of any significant increase in ethanol production.

“The reason for suggesting a moratorium is simply to give us a little time to take into account these much more complete numbers and see what they translate into in terms of grain prices and food prices,” Brown said during a telephone conference with reporters.

“If we keep going in this direction, we need to understand the consequences and be prepared to live with them. I don’t think we even understand the consequences now.”

Several local and national agriculture and ethanol producers and representatives on Thursday downplayed Brown’s report “I don’t think some of these people really understand the capacity of the American farmer and American agriculture,” said Terry Detrick, president of the Oklahoma Farmers Union and president of Oklahoma Sustainable Energy, which is planning an ethanol plant to be built in Enid.

“American agriculture has never let this country down on food to eat. In fact we have the cheapest in the world.”

Even though the ethanol industry is increasing demand for American corn, Detrick said farmers are expected to plant about 8 million more acres of corn this year than they did last year.

Many ethanol plants — including the proposed Enid plant — also are designed to use a blend of corn and sorgum or milo, which is not used for human or animal consumption.

Detrick pointed out that the ethanol process does not use the grain protein, which still can be used as an animal feed.

Bob Dineen, president of the Washington-based Renewable Fuels Association, said his organization’s estimates are as accurate as possible.

He questions the criteria used by Earth Policy Institute, saying some plants in planning stages included in the group’s estimates may never be built.

According to the Earth Policy Institute’s data, U.S. ethanol distilleries now online or in the works will use an estimated 139 million tons — or 5.5 billion bushels — of corn from the 2008 harvest to produce ethanol.

The group’s numbers are based on 116 existing ethanol plants, 79 under construction, 11 undergoing expansion and 200 plants in the planning stages expected to be running by corn harvest time in September 2008.

The federal government in a February report estimated ethanol plants would use about 60 million tons — or 2.4 billion bushels — of corn from the 2008 corn harvest.

Keith Collins, chief economist at the U.S. Agriculture Department, acknowledged industry estimates of ethanol production have lagged, but he was skeptical of the Earth Policy Institute’s estimates.

“That strikes me as high,” he said. “The point that they’re making is a valid point. The expansion in the industry has been outstripping everybody’s expectations.

“My experience over the last 18 months has been to be continually updating, increasing our own estimates of the production of corn use for ethanol.”

Brown, however, said increased ethanol production will reduce the amount of corn the country can export.

Developing countries will be most affected, he said, because they will not be able to pay the soaring cost.

“Do we really want to reduce exports and create chaos in the world economy in order to drive our SUVs?” Brown asked.

“That would not be a positive image for the U.S.”

The price of corn has surged about 30 percent to an average price of about $4.40 a bushel in 2006, up from about $3.40 per bushel in 2005.

Most industry observers attribute much of the increase to the growing biofuels industry.

Oklahoma Energy Secretary David Fleischaker said the potential benefits of increased ethanol production outweigh the increased cost of grain.

“In poor, developing countries, one of the highest costs they face are energy costs,” Fleischaker said.

“When the price of oil goes up, they are absolutely strapped. So the development of the biofuels industry is really to their benefit because it is something they can grow and produce.

“As technology improves and as we are able to convert more and more biomass feedstock into fuel, that means many countries will be able to develop their own sources of fuel, which will free them from having to import so much oil.”

Short-term price distortions are to be expected as the world economy develops the growing biofuels market, he said.

But, in time, those distortions will disappear because the market will level out, driving older, inefficient plants out of business and making newer plants more cost effective.

Kim Anderson, a marketing economist at Oklahoma State University, said it is unlikely ethanol production ever will provide too much competition for corn for food.

“I would say the odds are extremely low,” he said.

“The market will allocate the resource to its most profitable use. There is a limit to how much ethanol plants can pay for corn before production becomes unprofitable.

“We’re in a world market. We may screw it up for a while, but they’re going to make things work.”

Instead of focusing on biofuels, Brown said, the government should require much-improved fuel efficiency.

“Converting the entire U.S. grain production into ethanol would only equate to a 16 percent reduction in petroleum usage,” he said.

“Increasing the fuel efficiency standard by 20 percent would contribute far more benefit at a fraction of the cost.”

Fleischaker said the 16 percent reduction is a controversial number, but he agreed with the premise.

“I agree that significantly increasing fuel efficiency standards is way overdue,” he said.

“That is the first, easiest and best option for the federal government. But that does not take away from the importance of biofuels and other alternative energy sources.”

Contributing: The Associated Press

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