The US and its rising Ethanol Production


Scientific Study, 2007
9 Pages

Excerpt

The US and its rising Ethanol Production

EVENT

In the 2007 State of the Union address,1 US President Bush called on the country to produce 35 billion gallons of biofuel a year by 2017.

SIGNIFICANCE

President Bush’s proposal2 to increase biofuel production will dramatically increase the volume of corn required by the US ethanol industry and will translate into higher prices for both processed and stable foods around the world. Consequently, corn-based ethanol will continue to tie oil and food prices together in ways that will profoundly upset the relationship between food producers and consumers, with potentially devastating implications for global poverty. In addition, it will only replace a small percentage of US fuel consumption.

ANALYSIS:

The US Ethanol Market

In spite of the fact that the US began supporting3 its ethanol industry in the 1970s, as a response to the oil price shocks of that decade4, the US became more dependent on imported petroleum - and ethanol remained marginal at best.5 In 2002, growth picked up after world oil prices began their rise to a 2006 peak of over $70 per barrel. Coinciding with this rise in oil prices was the sudden raising of replacement of MTBE6 with ethanol in 20067. At this time the US Congress also continued a fuel tax credit for ethanol and passed the Renewable Fuels Standard (RFS)8 that contributed to increased certainty that the market for renewable fuels would total at least 7.5 billion gallons.9

The confluence of these factors contributed to an extremely favorable investment climate for new ethanol plants – mainly in Iowa and other parts of the US corn belt10. Consequently, ethanol’s share of total US corn continues to rise (See Fig.1).

Abbildung in dieser Leseprobe nicht enthalten

Moreover, when all plants currently under construction, or ones likely to be constructed11, are completed in 2008,12 fuel use will increase about 40% of total corn use,13 and the total corn use is projected to increase by 25% over 2005 levels. Ethanol production capacity could increase to 7.5 billion gallons by 2008-9.14 This trend will accelerate due to President Bush’s call in his 2007 State of the Union Address to produce 35 billion gallons of renewable fuel a year by 2017, nearly five times the level currently mandated.

Impacts for the US and world Agriculture

Consequently, if future oil prices are close to current levels,15 (which allows ethanol producers to make a normal 12% profit per bushel of corn), the fuel tax exemption and heavy subsidies of corn and ethanol are maintained16, then corn prices will stay high to keep corn production high17 (corn futures already rose to over $4.38 a bushel in March 2007, the highest level in ten years). Therefore, assuming continued growth in corn yields - hedge funds are making already huge bets on corn and ethanol, a 25% increase in US corn use over the next five years will require about a 20% increase in US acreage.18 This increase in acreage to grow corn in order produce ethanol will mainly come from switching land from other crops (such as soybeans or peas) to corn. The US already accounts for some 40% of global corn production and, with over 60% of output, is the largest corn exporter in the world.19

Moreover, similar forces will be seen around the world. Farmers in corn-producing countries such as Argentina, China, Brazil and South Africa will increase corn production in order to fill the void in world corn trade caused by the reduction in US corn exports.20 China, which also produces corn-based ethanol, will dramatically expand its corn output21 in order to meet the rising demand for feed and fuel.22 Simultaneously, the reduction in US soybean acreage is likely to increase the world price of soybeans and other oilseeds.23 It is already projected that the prices of oilseeds will rise by 26% by 2010 and 76% by 2020.24

Therefore, due to the fact that the first purchasers of corn and soybean meal are livestock producers, higher prices will decrease their return and international competitiveness dramatically25 - especially in the poultry and swine sectors.26 Additionally, if returns get too low, some producers will leave the industry and others will reduce production resulting in the increase of prices of chicken, turkey, pork, milk and eggs. This could change slightly in the future due to the fact that about one-third of the corn used in the production of ethanol (called Distillers Grains) could be available as a feed as a by-product of ethanol production. However, the appropriate adjustment processes27 that livestock producers will be forced to go through will take time and are not implemented yet.

[...]


1 [ The State of the Union adress is an annual address in which the President of the United States reports on the status of the country, normally to a joint session of Congress (the House of Representatives and the Senate). The address is also used to outline the President's legislative proposals for the upcoming years.]

2 The White House “President Bush Participates in Panel on Ethanol” February 2007 [Online], Available: http://www.whitehouse.gov/news/releases/2007/02/20070222-5.html

3 [This federal support for ethanol consisted primarily of fuel tax exemptions that gave gasoline blenders added incentives to use ethanol in their blends.] See: CorbWatch “Green Fuel’s Dirty Secret”, 1. June 2006 [Online], Available: http://www.corpwatch.org/article.php?id=13646

4 [In 1974, as the US were reeling from oil embargo imposed by the Organization of Petroleum Exporting Countries (OPEC), Congress took the first of many legislative steps to promote ethanol made out of corn as an alternative fuel.]

5 Runge, C. Ford, Senauer, Ben “How Biofuels could starve the Poor “ page 65, in: Foreign Affairs Vol.86, I May/June 2007.

6 [MTBE and other fuel oxygenates are major contaminants in ground water]

7 [That was based on the fact that oil companies and blenders feared liability for MTBE pollution.]

8 [That was under the Energy Policy Act of 2005]

9 Keith Collins “U.S. Economic Issues Related to Biofuels” 26 August 2006 [Online], Available:
http://www.usda.gov/oce/newsroom/congressional testimony/sentstbiofuels8-26-06 .doc

10 The Economist “The craze for maize” 10 May 2007 [Online], Available: http://www.economist.com/world/na/displaystory.cfm?story_id=9149882

11[The US already has over 110 active ethanol plants currently capable of producing more than five billion gallons of ethanol per year. An additional 58 plants currently under constructions] See: Agobservatory “How ethanol will change the US export!” January 2007 [Online], Available: http://www.agobservatory.org/library.cfm?refid=96658

12 [There are currently 110 ethanol refineries in operation. Many are being expanded, and another 73 were under construction.]

13Keith Collins “U.S. Economic Issues Related to Biofuels” 26 August 2006 [Online], Available:
http://www.usda.gov/oce/newsroom/congressional_testimony/sentstbiofuels8-26-06_.doc

14 [and more than 10 billion gallons by 2012.]

15 [ The average WTI price for a barrel climbed to $69 in 2006 and should remain around that level in 2007] See: Bloomberg“ Energy Prices” 16 May 2007 [Online], Available: http://www.bloomberg.com/markets/commodities/energyprices.html

16 [Direct corn subsidies equalled $8,9 billion in 2005]

17 The Economist “The craze for maize” 10 May 2007 [Online], Available: http://www.economist.com/world/na/displaystory.cfm?story id=9149882

18 Bruce Babcock “Impacts of increased Corn-Based Production in the United States” 2007 [Online] , Available:

19[Share of Corn Exports in 2006: US(65%), Argentina (12%), China (12%) Brazil (7 %) and others (4%)]

See: National Corn Growers Association “Statistic”, 2007 [Online] , Available: http://www.ncga.com/trade/main/trade_stats.html

20 Iowa State University “The Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A preliminary Assessment” page 4, 2007 [Online], Available: http://www.extension.iastate.edu/ag/AmaniPresent.indd.pdf

21 [It already increased its production to more than 150 million tons on some 26.8 million hectares of land in 2010, up from 144 million tons last year]

22 World Watch Institute “China to boost Corn Production” 1 May 2007.

23 Iowa State University “The Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A preliminary Assessment” page 4, 2007 [Online], Available: http://www.extension.iastate.edu/ag/AmaniPresent.indd.pdf

24Brandao, Antonio “Impacts of the US subsidyto soybeans on World price” 1. December 2007, [Onlin], Available: http://www.scielo.br/pdf/resr/v44n4/a02v44n4.pdf

25 Iowa State University “The Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: Assessment” page 4, 2007 [Online], Available: http://www.extension.iastate.edu/ag/AmaniPresent.indd.pdf

26 Runge, C. Ford, Senauer, Ben “How Biofuels could starve the Poor “ page 65, in: Foreign Affairs, Vol.86, Issue 3. , May/June 2007

27 [Part of the adjustment process that livestock producers will be forced to go through is incorporation of distillers grains into theis food rations.]

Excerpt out of 9 pages

Details

Title
The US and its rising Ethanol Production
College
The University of Sydney  (Faculty of International Relations)
Author
Year
2007
Pages
9
Catalog Number
V137708
ISBN (eBook)
9783640468768
ISBN (Book)
9783640468522
File size
462 KB
Language
English
Tags
Ethanol, Production
Quote paper
Philip Elsen (Author), 2007, The US and its rising Ethanol Production, Munich, GRIN Verlag, https://www.grin.com/document/137708

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