Left Behind

Some country elevators left behind
as ethanol diverts traditional supplies

By Catherine Merlo

Editor’s note: Merlo is a Bakersfield, Calif.-
based writer/editor with extensive experience
writing about cooperatives and the
issues that impact them.

n his 25 years as executive director of the Minnesota Grain and Feed Association, Bob Zelenka has faced farm crises, droughts and floods. But nothing has shaken him or the 600 country grain elevators and feed mills he represents as deeply as the current ethanol boom.

“It’s been the biggest thing to hit our industry,” says Zelenka, “and the hardest to adapt to.”

In the last year alone, Zelenka has seen almost a dozen Minnesota grain elevators go out of business and several others forced to consolidate “because of the ethanol industry’s growth,” he says.

Zelenka and his members aren’t the only ones worrying about ethanol’s growing appetite for corn. As more of the U.S. crop is diverted to ethanol production, some agricultural insiders are beginning to voice concerns over the pell-mell pace of the renewable fuel’s growth and its impact on various farm sectors.

While the ethanol gold rush delivers a much-needed boost for corn farmers and rural America — more demand for the yellow-eared crop, more ethanol plants, more tax revenues and jobs — a growing number of analysts are calling for a closer look at the boom’s wider-reaching consequences. Already, a “food vs. fuel” ethics debate is emerging in agricultural, energy and academic circles.

Some farm experts predict the explosion of corn-based ethanol production will shift demand away from important food and livestock needs. They say that could lead to potential corn shortages and higher costs for grain exporters, hog and poultry operators, transportation companies, even food processors. Others wonder whether vastly expanded corn acreage might consume marginal land and affect conservation practices.

Even Warren Staley, CEO of agribusiness leader Cargill, has questioned whether biofuels such as ethanol and biodiesel are the answer to U.S. reliance on foreign oil. Staley said that at a time when the need for increased food production is critical, promotion of ethanol runs contrary to Cargill’s priority to be the leading global food provider, Dow Jones’ MarketWatch reported May 1.

Moreover, Staley and others also have pointed out that even if all of the U.S. corn crop were used to produce ethanol, it would replace only about 20 percent of motor fuel.

“Ethanol is not the be-all, end-all solution,” says Don Roose, president of U.S. Commodities, an Iowa-based grain and livestock hedging and trading firm. “It’s one of a number of sources of renewable energy, and it’s unrealistic to think we can switch grain production over and stop imports of foreign oil.”

Ethanol’s “untethered” growth
Minnesota’s Zelenka has ruffled a few feathers in the last year by questioning ethanol’s unchecked growth, which, he says, is propelled by government incentives, not by the market.

“We get criticized for suggesting there are ramifications from the untethered growth of this industry,” he says. “But you can’t help but see that there are downsides to this industry’s growth that, unfortunately, no one seems to want to recognize.”

Zelenka points to grain elevators, which depend heavily on the export and domestic feed markets. Some now find themselves bypassed in the corn buy-andsell process because ethanol plants often prefer corn shipments straight from the farm. That leaves many elevators feeling the pinch of hard-to-find supplies to fulfill their market requirements. In some areas, corn deficiencies are driving up local prices, creating thinner margins for the grain storage businesses.

“A lot of our members have found that ethanol is a real threat to their existence,” says Zelenka.

For example, two or three years ago, some grain elevators invested $5 million each to build new shuttle-loading facilities. “Those were massive investments,” Zelenka says. “Now they’re having difficulty competing with, in some cases, a subsidized ethanol plant nine miles away. Who would have expected this explosion in ethanol?”

Ethanol boom forces
major ag changes

Fueled by increased demand for energy, ethanol commenced its eye-popping growth at the new millennium’s start. In 1999, there were 50 ethanol plants in the United States. Today, there are 102 ethanol bio-refineries, with another 42 under construction, reports the Renewable Fuels Association.

“Planned plants, if all develop, would take total corn processing into the 8.2- to 8.6-billion-bushel area — assuming processing for non-ethanol uses remains relatively constant,” says Robert Wisner, an agricultural economics professor at Iowa State University. “Other uses of corn are currently running at about 8.3 billion. This year’s corn crop, with the second highest yield on record, is forecast to be just under 11 billion bushels. The bottom line is that we will need a lot more corn acres in the next few years if most of these plants materialize.”

Many of those acres will come out of soybeans and will be continuous corn, Wisner adds, which carries a number of implications for other farm sectors. “Major adjustments will be required by a large part of the agricultural sector, including input firms and retailers, grain handlers, transportation firms, manufacturers of grain bins and handling equipment and livestock-related businesses,” he says.

Hard on hog producers
Among those wary of ethanol’s potential to devour U.S. corn supplies are hog and poultry producers. The ethanol explosion is “a negative” for them, says Glenn Grimes, professor emeritus of livestock marketing with the University of Missouri-Columbia.

That’s because those industries rely heavily on corn for feed. About 10 percent of the nation’s corn production is fed to hogs, Grimes says. On the plus side for livestock, ethanol production generates distillers grains (DDG), a high-protein co-product of ethanol that can replace corn in beef and dairy rations, and to a lesser extent in hogs and poultry (see page 22).

Both hog and poultry production are highly vulnerable to feed price increases. “Each 50-cent increase in corn equates to a $2.50 per-hundredweight rise in hog production costs,” Grimes says.

The breakeven price for producing live hogs during 2005-06 was $39-$40 per hundredweight, says Grimes. If corn prices should rise from their current $2-per-bushel level to $5 per bushel — not an impossible scenario — that could send hog costs $15 higher, pushing producers out of business.

“With the growth in ethanol production that is planned for the next few years, any kind of short corn crop would mean $5 or higher corn prices,” says Grimes. “With crude oil prices and government programs, ethanol plants can pay $8 to $9 and still break even. We’d see drastically lower U.S. hog production long before we hit $8 corn.”

Pushing hog producers out of business would remove many more jobs than found in ethanol production, Grimes says. “The number of people involved in producing ethanol from 1 million bushels of corn is much smaller than in raising hogs with 1 million bushels of corn,” he says.

Among the results of higher corn prices also would be “significantly higher food prices,” adds Grimes.

Another consequence could be a drop in corn exports as producers scramble to fill domestic ethanol orders. That export decline “could be a saving grace for Latin American farmers who have been battered by fierce U.S. competition,” writes the Council on Hemispheric Affairs (CHA).

Environmental consequences
Concern over environmental impacts has some observers waving a yellow flag over the alternative fuel’s booming development.

About five to six gallons of water are needed for each gallon of ethanol produced, Iowa State’s Wisner says. An ethanol plant that produces 100 million gallons of fuel a year will use about 500 to 600 million gallons of water annually. Many areas, including parts of Minnesota, are short on water supplies and have not planned for the high water use of thirsty ethanol plants. “Some areas’ water resources will be placed under stress,” Wisner says.

What’s more, America’s corn fields already take up the largest chunk of U.S. farmland, accounting for some 80 million of the nation’s roughly 357 million acres of farmable land. To meet escalating demand, corn acreage may have to expand another 3 million acres a year, says U.S. Commodities’ Roose.

That could mean spreading corn production into marginal land and drawing acreage out of conservation reserve programs. Such acreage expansion is likely if U.S. corn production is to reach the 15 or 16 billion bushels expected for food, ethanol and export needs, say Grimes and Wisner. That could potentially impact soil conservation and wildlife.

Rethinking ethanol policies
What Zelenka and others want is a more carefully thought-out national policy on ethanol. Many would like to see ethanol produced from corn alternatives, such as switchgrass, or corn stalks.

A clear hierarchy for the nation’s agricultural resources should be established, Zelenka says. In his opinion, that means a ranking of food, feed and fuel — in that order. Zelenka is not opposed to ethanol, calling its concept “good.”

“We’ve encouraged our members to work more closely with ethanol plants,” says Zelenka. “But it’s been a real challenge for [grain elevators]. It creates uncertainty when you don’t know when the next ethanol plant will pop up. They’re thinking, ‘Should I build additional storage? Improve my transportation facilities?’”

Open discussion, however, is difficult, says Zelenka. “People are scared to speak out,” he says. “The zeal to put these ethanol plants up clouds the realistic picture. It’s considered blasphemy if you say anything negative about them.”

Too far with ethanol incentives?
Like Wisner, Roose and Zelenka, Grimes recognizes ethanol’s positive impact on corn producers. But the University of Missouri professor thinks government incentives for the renewable fuel need to be re-evaluated.

“We do need to wean ourselves from foreign oil, but we’re going too far with incentives for ethanol,” Grimes says. “With $70 (per-barrel) crude oil, we don’t need subsidies to produce ethanol. With $50 crude, we do.”

Grimes says Middle East instability points to continued $70 or higher crude oil prices.

“There’s no stopping of ethanol plants with the incentives we have or the mandates for more ethanol in our fuel,” he says. “The market system itself would be more useful now than policy to promote the use of ethanol.”

Ultimately, the future of corn and ethanol may be determined by a combination of market forces and government policy, the system for many crops even now. “Our crops for export, feed and food have always been kept in balance by government programs,” says U.S. Commodities’ Roose. “It’s been a slow migration over the years. But with the new, unprecedented growth in ethanol, the story is yet to be written.”

Finding a balance for ethanol in the see-saw world of agriculture could pose a big challenge. The escalating pressure on corn supplies may come down to a matter of national priorities. At some point, the crop’s supply and demand could become inelastic, Roose says. In that world of corn scarcity, all cornrelated sectors will be fighting to keep their industries alive.

“Whether large or small, grain crops are 80 percent dependent on weather,” says Roose. “If we ever get a dramatically reduced crop as we did in 1983, ’88, ’93 and ’95, we’re going to have to ask, ‘What gives?’ or, more to the point, ‘Who gives?’”

Ethanol leaders aware of concerns

Ethanol leaders are aware of the concerns from various farm sectors about the consequences of ethanol’s corn-driven needs, says Matt Hartwig, communications director with the Renewable Fuels Association. “We’re very cognizant of the limits of how much corn can be used before it has negative impacts on other industries, which we don’t want,” he says.

With technological advances and improved efficiencies at both the farm and ethanol plant levels, “we’ll be able to get increased ethanol production using roughly the same acres as now,” says Hartwig.

By 2015, U.S. corn growers will produce 15 billion bushels per year, Hartwig says, based on numbers from the National Corn Growers Association. “We’ll be able to produce 15 billion gallons of ethanol, using 5 to 5.5 billion bushels of a 15-billion-bushel crop,” he says.

“Ethanol represents one of the, if not the, most important value-added industries for American agriculture,” adds Hartwig. “Its positive impact can’t be denied.”

USDA chief economist’s ethanol outlook

USDA Chief Economist Keith Collins addressed key ethanol-related issues in a statement before the U.S. Senate Committee on Environment and Public Works on Sept. 6. Following is a brief excerpt. For more on each of these points and Collins’ other comments, visit: www.usda.gov/oce.

September/October Table of Contents