May 9, 2006
US Farm Economy Revs Up Ethanol-fueled Engines
By Sam Nelson
CHICAGO (Reuters) - The burgeoning ethanol industry is changing the economic landscape of rural America, as companies pour billions of dollars into production plants in a race to meet demand and ease America's addiction to gasoline.Ethanol backers foresee vast vistas of corn fields churning out feedstock for the clean burning fuel additive running millions of cars in the United States, the world's largest consumer of energy.
"Ethanol is a tremendous economic engine for rural communities, it results in good paying jobs. You hear stories about opening up new gas stations and businesses taking off the boards from windows on main street," said Matt Hartwig of Renewable Fuels Association.
He said the industry helped create more than 153,000 jobs last year, boosting U.S household income by $5.7 billion.
But as the industry gears up, short-term ethanol supplies are scant at a time when refiners need it as an alternative to the gasoline additive MBTE, which pollutes groundwater.
"There are 97 ethanol plants on line now in the United States with a capacity of about 4.5 billion gallons and there are 35 under construction and will be on line in the next year or 18 months so we'll be looking at an additional 2.2 billion gallons," Hartwig said.
With record crude oil and soaring gasoline prices, some experts are worried about how deeply the burgeoning ethanol industry will cut into the food supply.
Cargill Inc. Chairman and CEO Warren Staley said last week the industry should focus first on food, then fuel.
"We have to look at the hierarchy of value for agricultural land use: food first, then feed and last fuel. Today we are providing subsidy to fuel uses while often erecting barriers to new food and feed technologies," Staley said.
A day after Staley spoke, Archer Daniels Midland Co. Chairman G. Allen Andreas said there was no consumption-versus-combustion debate.
"There's plenty of capacity to make food," Andreas said, noting there were "hundreds of millions of acres of land in Brazil" that could be developed into farmland.
ADM's board has plans to build a dry corn milling plant to produce 275 million gallons of ethanol a year in Columbus, Nebraska, next to its existing ethanol plant.
Analyst Rich Feltes, director of research for Man Global Research, said ethanol use would have to grow substantially before Staley's food-versus-fuel scenario came to pass.
"Right now with 15 percent of the corn used for ethanol production I don't think it's a significant policy consideration but by 2010 we'll be pushing 25 percent plus of the corn consumption and by then if we get into a short crop situation we'll be faced with this food versus fuel, gas tanks versus stomachs choice," Feltes said.
"And then I think it will become something very real and meaningful and important for the country and our policymakers to face," he added.
The U.S. Department of Agriculture has estimated that the amount of corn used to produce ethanol will jump from the 1.6 billion bushels this year to 2.0 billion next year or nearly 20 percent of the annual corn output.
Last year, U.S. ethanol production reached a record 3.9 billion gallons, according to the U.S. Energy Department and there are projections that by the end of 2007 ethanol production could be over 5.2 gallons.
Cargill's Staley also said he thought subsidies have skewed the economics of ethanol. The U.S. government gives refiners a tax incentive or subsidy of 51 cents for each gallon of ethanol they blend with gasoline. President Bush last week said Congress should drop a 54 cent-per-gallon tariff on ethanol imports from Brazil.
Bush's proposal sparked a backlash. "Once you peel away the layers of the onion on this issue you realize it doesn't make the most sense, we don't need more imported ethanol and Brazil isn't exactly awash in ethanol," Hartwig said.
And "by removing the tariff you essentially would be asking the American taxpayers to subsidize the production of foreign ethanol, the tariff is an offset to the tax that refiners are paid for blending ethanol," he said.
Grassroots supporters of ethanol claim U.S. producers can churn out enough green fuel alone, whether from corn or other bio-mass products such as switchgrass.
"The ethanol demand we have and will have in the future makes us more conservative in our marketings and it's had a very positive impact on our members," said Chip Flory, editor of market news for the farmer-friendly Professional Farmers of America organization headquartered in Iowa.
Planners such as Feltes see a bright future for ethanol and farming but also see a long and bumpy road as America grapples with soaring energy costs and its addiction to foreign oil.
"It poses some very challenging questions for agribusiness and the industry. Profit margins for ethanol plants are just phenomenal right now; large plants are being paid off in less than a year," Feltes said.
Demand for ethanol may someday outpace the ability of farmers to produce corn. That scenario stirs visions of a nation dependent on switchgrass as the key feedstock for ethanol plants.
"Ultimately I think this bio-mass thing will solve it but the key issue is how quickly can they get enzyme technology cheap enough," Feltes said.