All Things Considered: March 2007

The key question for ethanol is: how long will it take for the future to supplant the present?  The present, in North America, is ethanol from corn. But already U.S.
politicians are looking at the looming problems and pitfalls and
searching for a more sustainable future.

The key question for ethanol is: how long will it take for the future to supplant the present?

The present, in North America, is ethanol from corn. But already U.S. politicians are looking at the looming problems and pitfalls and searching for a more sustainable future.

The problems with corn are two fold. First, there are limits on how much corn can be produced. If all the potential corn acreage in the U.S. was turned over to producing for ethanol plants that production would represent less than 25 per cent of the motor vehicle fuel used in the U.S.

The second problem is that corn has many other uses. It is in everything from food to plastics and as the readership of this magazine knows it is a vital feed grain.

American legislators have recognized the pitfalls. Senator Tom Harkin of Iowa, chairman of the Senate Agriculture Committee says that this year’s U.S. farm bill will focus on energy. And he says that a key component will be moving from corn-based ethanol to cellulose ethanol.

In effect, Harkin is arguing for lots of U.S. spending to jumpstart research in converting cellulose so that ethanol doesn’t turn U.S. and world corn markets completely upside down. However, in the next few years it does look as if the markets will be severely tilted.

The problem with the alternative is that ethanol from cellulose is twice as expensive to make as ethanol from corn and the technology isn’t fully in place.

Harkin and others are rightly worried about corn. U.S. ethanol production has rocketed ahead in the last couple of years. It now takes 20 per cent of U.S. corn. But that is just the start. There are now about 110 ethanol plants operating in the U.S. There are about that number currently under construction and 200 more are said to be in the planning stage.

Adding to the concerns, the new plants are bigger than those now operating. While corn ethanol supporters say this isn’t a problem, arithmetic points to a different answer. Four times as many plants as now operating and an even greater increase in total capacity could well equal a problem.

Canada hasn’t matched the Americans’ breakneck pace in putting up ethanol plants. But powered by government regulations and subsidies we’re trying to catch up. Canada is also different because this country has a corn deficit – in other words we already use more than we produce. Up here something will have to give. Either we will have to import more or we will have to find other grains to do what corn now does.

Going forward there is a great deal of talk about E-85 (which is 85 per cent ethanol). This would be a quantum leap from five per cent ethanol currently in some fuel and the 10 per cent planned for the near future. Where the feedstock for a significant increase in E-85 consumption would come from is straightforward. Initially it would come from other corn uses, after that – supplies would run out.

Ethanol got its start as a clean burning fuel additive. It then morphed into a gasoline supplement officially aimed in the U.S. at cutting dependence on foreign energy suppliers. But it also plays a role as an indirect, WTO compliant farm subsidy.

The U.S. has long had a problem – because of new varieties, good growing conditions and generous crop, price supports – of producing more corn that it could sell at anything approaching the real cost of production. The result was significant surpluses.

Ethanol resolves these problems. It boosts consumption, is on the verge of eliminating surpluses and is moving corn prices up, reducing the need for U.S. government crop payments.

But it does it by requiring increasing amounts of ethanol in gasoline. The regulations are accompanied by government payments to ethanol producers and/or price guarantees and government support for putting up new ethanol plants.

In effect, instead of directly subsidizing U.S. corn producers, federal and state governments are now indirectly supporting corn prices by stimulating ethanol demand.

In Ontario, the same thing is happening. The trouble is Ontario hasn’t been a surplus corn producer for years and there are major agronomic limitations on how much corn can be grown.

On the Prairies corn is a minor crop. But ethanol can be produced from wheat and other small grains. At present, the talk is of using feed wheat or weather damaged wheat for ethanol.

Doing that makes sense except the livestock industry depends on feed wheat and/or imported corn. A significant build-up in the Prairie ethanol industry would necessitate ensured supplies. That could mean either licensing new, higher yielding, low- protein wheat aimed specifically at the ethanol market or competing with export prices for bread wheat.

Another difficulty is that wheat isn’t as desirable as corn as an ethanol feedstock. In effect you don’t get as much bang for your acre. This is easily demonstrated by the direction the industry has taken in the U.S. In the U.S. they already have low-quality, low-protein high-yielding wheat varieties available, but corn is king.

None of this would matter if ethanol was a residual user of grain – if the industry jumped into the market to absorb and convert surpluses into fuel. But ethanol is a primary user. Because gasoline, by law, must contain ethanol and the ethanol plants must keep running they must and will ensure supply of feedstock. As their demand increases, barring year after year of record crops (and even that might not be enough), other users will have to line up behind the ethanol guys to secure supplies.

And if there is ever a major crop problem (such as the drought of 1988) everyone will scramble.

If anyone thinks this is just all so much cackling by Chicken Little all they have to do is look at the supply and demand picture. U.S. stocks of stored corn fell by a billion bushels despite a decent crop. The U.S. is expected to have less than a billion bushels in store this year and demand is expected to grow. A near record crop could be required just to stay even.

The situation is so interesting that even Wall Street has noticed. Stocks in fertilizer companies have taken off as have the price of shares in Monsanto, a seed supplier. We better hope that Wall Street is right and farmers do everything they can to boost production because we just might need it, at least until Senator Harkin’s future arrives.