The Convergance of Agriculture and Energy

By  Kenneth Cassman

This commentary is from the Council for Agricultural Science and Technology (CAST) and the primary author, Kenneth Cassman, spoke at the recent Corn, Cattle and Ethanol summit co-sponsored by NC.  The article provides an objective overview of corn and ethanol production.

In the U.S. – as in all areas of the world – access to an adequate energy supply at reasonable cost is crucial for sustained economic growth. Unfortunately, oil prices and the need to import from politically unstable countries lowers the reliability of the U.S. energy supply and hinders economic development. Although biofuels have been identified as an important component of the national strategy to decrease U.S. dependence on imported oil, the ability to sustain a rapid expansion of biofuel production capacity raises new issues.

While the goal is to enhance the long-term economic and environmental viability of the biofuel industry and its positive impact on agriculture, rural communities and national security, the new Farm Bill will be a crucial driver of policies related to biofuels. Despite uncertainty related to global trade negotiations, key components of this bill must address agriculture’s role in providing new sources of energy.

Grain-based ethanol is currently the only major source of biofuel for the United States, and the magnitude of increase in grain-ethanol production is expected to have a large impact on commodity prices, agricultural profitability and global food security during the next 5 to 10 years. Future decisions and policies are relevant to fostering development and sustainability of other biofuel systems, including ethanol from sugar crops and ligno-cellulosic biomass, and biodiesel from oilseed crops.

The Ethanol Market

While ethanol production in the United States has grown steadily in the past 25 years, there has been a dramatic increase in recent years (Figure 1). Increases in ethanol prices since 2002 supported a rapid increase in annual production capacity, from 1.7 billion gallons in January 2000 to 4.3 billion gallons in January 2006. The locations of plants in operation and under construction are shown in Figure 2. By June 2006 there were 101 operating plants with 4.8 billion gallons of capacity; 34 new plants and 7 expansions were under construction, which will add 2.2 billion gallons of production capacity. These data indicate that industry capacity will increase to 6.0 billion gallons by January 1, 2007 and to 7.0 billion gallons by January 2008. Many more plants and expansions are planned and should result in a continued rise in capacity through 2008 and beyond.

The rate of expansion depends largely on the continued profitability of ethanol production.

Major factors affecting ethanol plant profitability are the price of ethanol and the costs of the feedstock (primarily corn) and the boiler fuel. Ethanol price is dependent primarily on gasoline price, which depends on the price of petroleum.

What does a scenario of increased ethanol production capacity suggest for ethanol prices? Ethanol prices reached historic highs during the summer of 2006 as the industry increased production to provide enough ethanol to replace all of the methyl tertiary-butyl ether (MTBE) used in gasoline. The industry should have enough capacity to supply the petroleum industry’s requirements for oxygenates by the end of 2006. Ethanol prices for the last 3 months of 2006 and for 2007 are moderating, and the new ethanol production capacity should supply future needs without an excessive increase in ethanol prices. Hence, for the foreseeable future, ethanol prices should continue to track the price of petroleum closely.

If ethanol production remains relatively profitable, Congress may consider lowering the 51¢ blender’s tax credit, which will result in ethanol prices lower than wholesale gasoline prices. Although events of the past year may have enhanced consumers’ demand for renewable fuels, these fuels must be priced competitively with gasoline for sales to increase. For these reasons, the industry can expect ethanol to sell at prices closer to the wholesale price of gasoline in 2007 and later years. With petroleum prices expected to range from $53 to $63 per barrel, ethanol prices should range from $1.50 to $2 per gallon in the foreseeable future.

How Rapidly Is the Ethanol Industry Expected to Grow and What Is the Impact on Corn Markets?

Table 1 provides one scenario of growth in the ethanol industry over the next several years and the associated impact on corn demand. Ethanol production has been estimated on a marketing year basis (September through August). In this scenario, ethanol production increases more rapidly during the next 2 years and then more slowly, reaching a production level of 9.7 billion gallons by 2010–2011. The industry continues to expand because ethanol production is projected to be profitable given the expected price of gasoline, ethanol and corn. As more corn is purchased by the ethanol industry, the price of corn increases, making corn production more profitable than competing crops, and farmers increase the acreage planted to corn. Harvested corn acreage is expected to increase by approximately 9 percent, from 73.6 million acres in 2004–2006 to 79.9 million acres in 2010. The additional land planted to corn likely will come from decreased soybean, wheat, cotton, barley, sorghum and Conservation Reserve Program (CRP) acreage.

Coproducts from ethanol production vary by ethanol plant type. Distillers grains with solubles can be produced in either dry (DDGS) or wet (WDGS) form. Dry mills represent the majority of ethanol plants. The proportion of dry mill versus wet mill ethanol plants is changing over time and new technologies are being introduced that broaden the types of coproducts produced. Table 1 lists the amount of coproducts expected but does not separate the amounts by product type.

Can Enough Corn Be Produced for Food, Feed and Fuel?

Corn production in the United States increased from 4.17 billion bushels in 1966 to 11.11 billion bushels in 2005 (USDA–NASS 2006). Approximately 80 percent of this increase resulted from higher crop yields and approximately 20 percent from expansion of crop area.

The rapid expansion of ethanol production currently under way will require greater amounts of corn than previously predicted before the recent, abrupt rise in oil prices. In fact, U.S. ethanol production capacity will easily pass the 7.5 billion gallons per year mandated by the Energy Policy Act of 2005 (Table 1). A capacity of 10 billion gallons by 2010–2011 is more likely. Some in the corn industry believe it will be possible to produce 16 billion gallons of ethanol by 2015 while also meeting corn grain requirements for human food and livestock feed. In addition to increasing average corn price (Table 1), rising corn demand for ethanol production will amplify price volatility as the market responds to news that will affect supply (such as drought or delayed plantings) or demand (such as increased exports).

The rate of gain in corn yields ultimately will determine the ceiling on grain-ethanol production capacity that can be sustained without causing global food deficits, high corn prices, and pressure to expand corn production onto marginal land. For example, a 9.7 billion gallon annual production capacity in 2010–2011, shown in Table 1, would require 28 percent of U.S. corn production, assuming a harvested area of 79.9 million acres and a trend line yield of 156.4 bushels per acre. Increasing the rate of gain in corn yields above the current trend line will be required to expand ethanol production substantially beyond this target without major perturbation to national and global corn markets and other industries that rely on corn.

Can All the Coproducts Be Used?

The distillers grains complex represents valuable coproducts of ethanol production from corn grain. Distillers grains can provide from 35 to 40 percent of the total diet for feedlot cattle. For dairy cattle, the maximum amount of inclusion is much lower. Although DDGS also may be fed to swine and poultry, they are not effective substitutes at dietary amounts in excess of 10 to 20 percent. Hence, the major market for coproducts is the cattle feedlot industry, unless DDGS are processed further into gluten feed, gluten meal and corn oil.

With increased ethanol production, more coproducts may be generated than cattle feedlots and dairies can use. If this situation occurs, coproducts can be burned as an energy source for ethanol plant operation or exported to foreign markets. But the energy requirements for drying coproducts for transport as DDGS represents roughly one-third the total energy used in a typical ethanol plant. In addition, the drying process may decrease nutritive value. Thus, a trend toward using WDGS as cattle feed is emerging because of the lower energy requirements and greater potential profit.

Transportation costs are a critical factor in considering plant location. In addition to optimizing plant location, a move toward “closed-loop” ethanol plants adjacent to beef cattle feed lots is feasible. In this scenario, cattle are fed larger volumes of the coproducts, and cattle waste products and excess coproducts are used as additional fuel sources to replace a substantial portion of the natural gas used to power the biorefinery.

Increases in grain-to-ethanol conversion efficiencies are possible from genetic improvement of corn grain characteristics, improved ethanol plant design, and grain fractionation to use coproducts for biofuel production. Fractionation separates the seed coat fiber and germ from the starchy endosperm so that only starch is fermented. The germ can be used to produce biodiesel, and research is under way to use the fiber as a cellulosic feedstock for ethanol production, which would increase total biofuel output by approximately 10 to 20 percent from a corn-ethanol plant. Ultimately, broadening the use of distillers grains for nonruminant feed rations and other value-added uses will determine whether the coproducts generated from the rapid expansion of grain-ethanol production capacity can be used in a cost-effective and environmentally sound manner.  Y By Kenneth Cassman, chair, Dept. of Agronomy and Horticulture, Univ. of Nebraska; Vernon Eidman, Dept. of Applied Economics, Univ. of Minnesota; Eugene Simpson, Dept. of Ag. Economics, Auburn Univ.