Revisiting ethanol mandates

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Food and livestock groups are continuing their call for the government to reevaluate ethanol policies, especially the Renewable Fuels Standard (RFS) mandate, in light of the recent flooding.

Please understand, I'm a big supporter of ethanol. However, this year weather's ugly hand has challenged the notion that US producers can produce enough corn for feed, food and fuel.

Earlier this spring, the state of Texas requested a waiver of the 9 billion gallon RFS corn-based ethanol mandate. The Environmental Protection Agency Administrator Stephen Johnson can grant the request if he sees the mandate poses "severe economic harm" to a state, region in the nation.

When the request was first in April, the odds were against getting scaling back the corn-based ethanol mandate. Now the chances could be swinging in favor of reducing the mandate. What originally seemed as an easy mandate to meet with expected ethanol capacity, this year's short corn crop could be devastating for the future of the ethanol industry as well as other end users.

EPA's public comment period regarding the waiver request closed Monday, June 23. A final decision on the request should be known by the end of July.

In discussions with Tom Elam, president of, he explained if the EPA administrator chooses to waive the mandate in 2008, almost immediately another request will have to be made for 2009 since this year's corn crop will have to get us through Sept. 1, 2009 when next year's crop is harvested.

Last week the Environmental Working Group released a report, Biofuels and Bad Weather: America's Food-to-Fuel Gamble, which stated the increased corn production needed to meet larger corn ethanol production banks on good weather, which is not occurring this year.

The true impact of reducing the mandate on food prices remains unknown, explained Paul Hill, chairman of West Liberty Foods and National Turkey Federation chairman. "But we haven't seen the full price increases. If we can stabilize the upward spiral we can move these price increases through the system in a proper manner. This has the whole industry caught off balance."

Livestock group representatives stated the reduction in corn for ethanol won't reduce corn back down to $3-$4. Hill stated the mandate reduction might lead CBOT prices to back off $1-$2 from their current highs of $7-8. Previous studies have indicated prices would back down potentially less than 50 cents.

In support of the RFS, the American Farm Bureau Federation wrote in its letter to EPA that although Texas officials assert the state's livestock sector is experiencing severe harm due to increased corn prices caused by the RFS, no data linking the two is provided. Increased corn prices are caused by numerous factors, AFBF wrote. These include record export demand fueled by a weak dollar, record domestic feed use, a flood of speculative money into the commodities markets, and dramatic price increases for crude oil and energy.

Ethanol demand

The increase in corn demand due to ethanol is rising faster than growth in corn yields per acre, and sets up tight corn supply and demand scenarios in the future, stated Keith Collins, former chief economist for the U.S. Dept. of Agriculture in an economic analysis.

Collins wrote the analysis, The Role of Biofuels and Other Factors in Increasing Farm and Food Prices, as an economic advisor for Kraft Foods. He also submitted the paper to the Environmental Protection Agency (EPA) as part of its request for comments regarding Texas' renewable fuels standard waiver request.

"So long as that situation continues, corn will have to attract acreage from other crops to meet its expanding demand. This shift will mean higher prices for all crops that compete, directly or indirectly, for acreage with corn," he said. The market projects a continually tight corn supply and demand balance for the next several years, evidenced in current high cash prices and futures prices for the next several years.

Collins' paper reviews various studies that have examined the relationship between corn used in ethanol production and corn prices. They suggest increased corn demand for ethanol could account for 25 to 50% of the corn price increase expected from 2006/07 to 2008/09. Another analysis presented in the paper suggests that ethanol could account for 60% of the expected increase in corn prices between 2006/07 and 2008/09 when market demand and supply are inelastic with respect to price--i.e., a period when stocks are very low, feed use is slow to respond, export demand is strong due to foreign agricultural policies, and acreage is very constrained.

The USDA has stated that biofuels policy has had very little effect on food prices -- as little as 2-3%.  However, Collins said biofuels are becoming a significant factor in higher food prices. "The increase in retail food prices due to biofuels is estimated to be 23-35% above the normal increase in food prices that would occur over 2-3 years," Collins wrote.

Food price investigation

A coalition of farm and commodity organizations urged congressional leaders to promptly initiate comprehensive hearings to examine all the reasons for increased retail food prices. The coalition urged the hearings to focus on the underlying causes of the rise in food prices, which sectors of the economy are responsible for the rise in prices, and whether any of them have benefited unduly from such prices increases.

In a letter to House and Senate leaders, the coalition noted recent media reports have attributed higher commodity costs paid to farmers as the cause of higher costs passed on to consumers.

"Such a perspective is a great disservice to the general public because it ignores the facts behind higher prices. Equally important, however, is the concern that, left unchallenged, such reports will help to shape public opinion and public policies in ways that are detrimental to U.S. agriculture," coalition members wrote in a letter.

While recognizing that higher retail food prices are affecting many people here at home and abroad, the coalition told members of Congress that pointing the finger of blame only at farmers, whose share of the food dollar is small compared to other entities, is wrong and does not provide the true picture of what is driving up food costs.

The American Farm Bureau Federation, National Farmers Union, National Corn Growers Association, American Soybean Association, National Sorghum Association and National Association of Wheat Growers signed the letter to congressional leaders.


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