Ethanol’s Impact: Fuel boom transforming mid-Missouri farm economics
High grain prices help corn farmers, hurt livestock farmers and consumers
Terry Hilgedick, a farmer from Hartsburg, owns what appears to be one of the modern gold mines of mid-Missouri.
Just calculating income from the 750 acres he plants in corn—assuming average September prices with typical Missouri yields on his irrigated, river-bottom tract—he will have earned $325,000 by the time he has sold this year’s harvest.
That compares to $210,000 a year during the 20 or more years when corn, with slight annual variations, sold for about $2 per bushel, compared to the current price of more than $3.
That figure doesn’t include income from soybeans he raises.
Working roughly the same 1,600-acre tract that was owned and worked by his grandfather and father, Hilgedick has the traditional farmer’s reluctance about discussing financial windfalls—and how he plans to spend them.
“It’s no different than getting a raise on a job,” said Hilgedick, former president of the Missouri Corn Growers Association. “We’ve had a couple of good years. There are 1,000 places to spend your money on a farm. You can always trade in a pickup or get a new tractor. We retired some debt. We bought a little equipment to replace stuff that was wearing out.”
Hilgedick pulls no punches, though, about the source of his good fortune: ethanol. “In terms of the steepness of the grade” of improvement, “ethanol is unsurpassed in my lifetime,” said the 42- year-old farmer.
Virtually all of the rapidly growing U.S. production of ethanol is corn-based.
The industry is fueled by federal and state government mandates for ethanol use, high gas prices and relatively low corn prices. During the past three years, Missouri’s ethanol production has escalated from around 30 million gallons to more than 200 million gallons. There are now five farmerowned ethanol production plants in Missouri, including three within 60 miles of Columbia, and four more plants planned or under construction, including two within 100 miles of the city. As for Missouri’s corn production, the harvest this fall is expected to set a record.
However, there are warning signs that the boom could bust, or at least slacken. The price of ethanol had dropped roughly 30 percent since May, and analysts are warning that a glut of ethanol could stymie the industry’s expansion and make it harder for new ethanol plants and those under development to succeed. The price of corn has risen, which makes it harder for ethanol plants to make a profit.
Rex Ricketts, coordinator of the University of Missouri-Columbia commercial agriculture program, ranks the advent of the new ethanol boom among three truly transforming events in the history of agriculture: the tractor, rural electrification and the tractor-trailer truck, which allowed for the effi- cient, relatively cheap distribution of farm goods to urban areas.
U.S. Department of Agriculture estimates indicate that farmers will bank a record net farm income of $87.1 billion this year—a 48 percent increase from 2006.
Not all the increase stems from ethanol—directly. Almost all grains—particularly corn, soybeans and wheat—have posted record or near-record prices since last fall. Soybean costs rose in part because the supply had been reduced.
Farmers nationally reduced their acres planted and switched to profitable corn; Missouri farmers followed suit and reduced their soybeans by more than 11 percent while they hiked their corn acreage by almost 15 percent. Wheat prices benefited from poor weather in Canada, Europe and Australia—the typical reason for past major fluctuations in prices— and a surge in demand from developing countries such as India and China.
Noticeably absent from the record setting are livestock producers, who must compete with consumers and overseas buyers for corn and other grains to feed their animals. The livestock farmers have accounted for more than half the market for corn historically.
Hog producers, after three years of profits, are expected to lose money in 2007, thanks to a 16 percent increase in operating cost for items such as feed, according to an MU Food and Agricultural Policy Research Institute report. After the Chinese bird flu scare, consumption of poultry fell worldwide, and by the summer of 2006, American producers already were trimming their flocks, perversely to their market advantage, said Ron Plain, an MU agricultural economics professor.
Ethanol may slightly reduce the cost when mixed with gasoline, but consumers will pay more, because the average grocery store carries 4,200 items that contain corn syrup or other corn products.
By the end of August, 2007 food prices had risen 4.7 percent, or substantially more than the usual 2 percent rise this decade. In the past year, bread prices have increased 12.1 percent, ground chuck 6 percent, chicken 9.3 percent and eggs 31.6 percent, the U.S. Bureau of Labor Statistics reported.
Dan Hudgens, president of the Missouri Egg Council, who owns a reseller in Joplin, said only 1 cent of the large increase in the cost of eggs is attributable to cost of grain. He instead cites a more likely market force: “supply and demand.”
Agricultural analysts note that prices don’t rise simply to match the cost increases borne by producers. Instead, analysts fear a more ominous development that could fuel food inflation: herd or flock reduction, which is often more difficult to reverse.
Oil, incentives and Archer Daniels Midland:
Keys to the drive toward ethanol
The ethanol industry owes its start to Archer Daniels Midland, the agribusiness giant that processes soybeans, corn, wheat and cocoa and still accounts for 25 percent of all ethanol production in the U.S. Its CEO from 1971 to 1996, Dwayne Andreas, had a natural hand for politics—and campaign contributions—and the company dominated both the industry and its trade association, the Renewable Fuels Association.
All suffered, however, because the low cost of crude oil often wouldn’t justify the cost of manufacturing the ethanol. Andreas helped convince Congress in 1978 to enact a 51-cents-a-gallon subsidy for companies that blend ethanol with gasoline.
In 1995 the association backed a successful federal proposal to allow use of ethanol as an oxygen enhancer for gasoline. A major turning point, though, occurred when California banned the chemical MTBE as an oxygenate in 1999 after it was found to contaminate groundwater when spilled. The decision spurred a boomlet of ethanol plant construction.
The major breakthroughs occurred in 2005. Congress passed an energy act setting renewable fuel standards that called for the use of 7.5 billion gallons of ethanol by 2012. Oil broke the $50 barrier for a barrel of crude, and ethanol became profitable. Last year, ethanol plants produced at a cost of $1.34 a gallon, but ethanol sold for $2.58.
Costs have been reduced because the U.S. enforces a 54-cents-a-gallon tariff on imports that until recently all but prohibited sale of Brazilian ethanol, which is produced, more cheaply, from sugar cane.
Besides those federal tax breaks and trade advantages, several states have passed incentives to promote the use of ethanol and encourage plant building. Missouri provides a tax credit of up to $15,000 for persons who invest in ethanol cooperatives. It also added another credit—which can be sold for cash—of 20 cents per gallon for plants.
Missouri blazed the path for mandatory marketing; at Gov. Matt Blunt’s urging, the legislature enacted a requirement that all fuel sold in the state contain 10 percent ethanol if it’s price competitive—and it obviously has been.
Plain’s explanation of the pricing history for corn shows three phases. Corn averaged 78 cents a bushel from 1908 to 1942. When wartime price controls were lifted, corn rose to an average of $1.26 for the next 30 years. When the Soviets began trading heavily for American farm goods in the 1970s, the price rose to $2, where it largely remained for more than another 30 years.
But ethanol broke the 4 billion-gallon production mark in 2006 and—almost immediately—prompted a surge in corn prices when farmers began selling their harvests. At the end of September 2006, corn prices fell below $2, but the price for America’s most plentiful crop had soared to more than $3.50 by the end of the year.
As planting began in spring 2007, corn prices were higher than $4, and farmers began switching crops to take advantage of the market. After another peak above $4 in June, the price drifted downward until it reached almost $3 near the end of September.
Construction of ethanol plants generally take 18 months to complete, and the industry responded quickly to the flurry of federal, state and market initiatives. So far, 128 plants are operating in 26 states. In addition, 77 plants are under construction, and 100 are planned, although Wall Street has cooled on its plans to invest, and some plans have been cancelled, including one in Malden, Mo.
The plants under construction will double the output of current plants, and together they will hit annual production of 13 billion gallons, or far in advance of any federal energy requirement.
In Missouri, four plants are now operating, in Macon, Laddonia, Craig and Malta Bend. A fifth soon will begin functioning, and numerous others are planned.
A February 2007 report by the MU Food and Agricultural Policy Research Institute—sponsored by the state corn growers association—estimated that the ethanol industry has increased the value of corn production statewide by $76 million.
Where do you stop?
“Right now we are building ethanol plants as fast as we can,” Plain said. “Where do you stop? I would say the right amount is $4-a-bushel corn” as long as oil imports at about $70. “There’s an equivalency with oil at $4.”
If corn stays below $4, he expects current operations to continue, but far fewer new plants will go online. Corn priced higher than $4 should prompt additional construction, although those calculations could change depending on crude oil prices. Current crude levels could prompt more plants if they continue, Plain said.
With oil pricing surpassing $80 this summer, a more important question may be where the plants will be constructed, Plain said.
“By and large, we have built plants where the corn is produced. So they have been built in the Midwest. But the markets pushing ethanol are not in the Midwest. We may need to move a growing number of plants to the coasts and ship the corn there. We can rail it or truck it,” he said. “From a national standpoint, we are overbuilt in the Midwest. We would be better off building ethanol plants in California and sending the corn there rather than [building them] in Missouri.”
Downsides of ethanol boom
For an industry so new and demand generally government mandated, ethanol poses numerous vexing questions that haven’t been answered.
One disquieting fact is beyond dispute. A gallon of gasoline is not a gallon of ethanol. Everyone agrees that a gallon of gas generates 50 percent more BTUs than ethanol, a fact known by anyone who has driven—and repeatedly filled the gas tank on—a flex-fuel vehicle, which burns 85 percent ethanol.
But for example, does ethanol truly provide a common-sense solution to energy needs?
David Pimentel, a Cornell ecology and agriculture professor who chaired a U.S. Department of Energy panel on ethanol production, maintains that “abusing our precious croplands to grow corn for an energy-inefficient process that yields low-grade automobile fuel amounts to unsustainable, subsidized food burning.”
Pimentel maintained in a 2001 report:
• Just to grow the corn crop required $1.05 for each gallon of ethanol produced.
• Producing a gallon of ethanol, including processing, took more energy than the fuel can produce for an auto.
• Pimentel added 23 cents a gallon to the cost to account for the environmental damage that ethanol causes. He said corn production erodes soil 12 times faster than the rate at which it can reform. He also cited the potential depletion of shallow acquifers—especially in heavy corn-producing states like Nebraska—as a special problem.
Pimentel followed that study with a 2005 report that found ethanol from corn required 29 percent more energy to produce than the fuel generated.
Pimentel’s studies ignited a furor in the media. Many widely read columnists have adopted his arguments, while the corn industry and others have taken sharp issue with his conclusions. The National Corn Growers Association, citing numerous references to Pimentel’s work, responded that Pimentel’s figures doubled the amount of energy used on the farm, according to the U.S. Department of Agriculture.
Bill Casady, a MU associate professor of agricultural engineering with a specialty in energy matters, spent part of the day with Pimentel. “I didn’t think I would like him, but he’s a very nice guy. He admits to an agenda. He thinks all Americans should use half the energy we use,” Casady said. “His work is typically determined to be flawed.”
Like the corn growers association, Casady suggested that Pimentel’s study did not take into account more recent energy usage data. “We are much more energy efficient at producing ethanol today than we were 20 years ago. We have better yield on crops. We produce more energy with the same amount of corn. Now we get 2.7 or 2.8 gallons [of ethanol] per bushel of corn. The average yields may be more efficient. We’re using less fuel than we used to. That translates into a better picture of ethanol than we used to have,” Casady said.
Casady also maintained that “the energy conversion from petroleum fuels is very poor.” He indicated that petroleum requires “120 percent of the energy in a gallon of gas just to get it to you.”
He’s less definite about his conclusions on the efficiency of ethanol, but he notes that agriculture department and Argonne National Laboratory studies indicate that ethanol posts a net energy gain.
A question of federal policy
Farmers who raise beef and pigs wasted little time responding after corn prices skyrocketed.
In February and March, the National Cattlemen’s Beef Association and Nation Pork Producers Council both urged Congress to repeal the federal incentive for companies that blend gasohol and the tariff that raises the cost of Brazilian ethanol, although both organizations pledged general support for biofuels and the pig farmers took special note of “criticism” over their position.
As late as April, the pork producers group testified before the Senate Agriculture Committee in favor of both proposals, and news reports indicated that the fight between livestock groups and corn growers threatened the bill’s viability.
But in June, an array of livestock groups created a Web site—balancedfoodandfuel.org—that aims for balance treatment of producers and their herds, but drops the specific demand for letting the blender’s tax credit expire. It instead promotes the end of the tariff and limiting “new mandates…to energy from emerging bio-based sources [i.e. cellulose and methane] that do not adversely impact animal feed availability.”
The House-passed farm bill included new incentives for ethanol production. Don Nikodim, executive director of the Missouri Pork Association in Columbia, just returned from Washington and denied that the group was taking sides on the ethanol-related questions. “It’s good to see the corn guys making some money. By and large, people in agriculture support biofuels. We didn’t lobby on either side,” he said.
Nikodim was focused on approving trade agreements with South Korea, Peru and Columbia that would raise the income for pig farmers. “If we can get the Korean agreement, the price of a pig will go up $10,” he said.
Nikodim acknowledged that pig farmers are flinching from the hiccup in the price of corn. “Corn and soybeans make up 90 percent of our feed,” he said. “Feed costs are really biting us. Feed, energy and petroleum tend to drive everything. I’m aware of no herd reductions taking place at this time. If anything, from what I hear, there’s been an expansion,” he said.
Herd reductions, if they take place among beef and pork producers, pose an immediate danger for consumers because market costs rise to compensate for the low supply. “When the price of feed goes up, the big increase in cost to me eventually is … there are fewer critters on the market,” Plain said.
He noted that herd reductions already have been apparent among beef cattle. “Farmers delayed placement into feed lots. Calves stayed on grass longer. They spent fewer days in the feed lot. Weights dropped, even though they got slaughtered later. As long as that’s happening, beef goes up. There’s less beef on the market, so the prices are higher,” Plain said.
Mike Geske operates a 2,100-acre farm in Matthews, a community in the Bootheel’s New Madrid County, and serves as president of the Missouri Corn Growers Association. He plants 950 acres of corn.
Geske takes umbrage at the perception that corn farmers are on Easy Street these days. He recalls selling corn in 1994 after a drought and making $4.86 a bushel. He’s heard that some years in the 1970s brought prices of $3 to $3.50.
“The prices we’re getting are a long ways from a record” if adjusted for inflation. “It’s frustrating as a farmer. Food prices are going up, and you take the blame. A few years ago, we were getting blasted for federal subsidies,” billions of which are expected to disappear this year, Geske said.
Geske blames food production companies for the public troubles that corn growers and the ethanol industry face. The Grocery Manufacturers Association, which is made up of food preparation and packaging companies, did lobby in Washington for eliminating the blender’s credit and tariff on Brazilian ethanol.
“Really the ones who have been most vocal are companies like Tyson,” Geske said. They are using the price of corn as a crutch to justify their own price increases. The cattle people are really getting good prices. Certainly, there are some farmers who are suffering some stress. That’s life in agriculture. The corn farmer has been suffering for a long period of time.”
Geske fears that corn growers already must face a bleaker future, although other analysts say the higher costs for corn are almost certainly fixtures.
“There has been a huge shift out of cotton into corn [this year]. But the bloom is off the corn now. The decrease in the price since last spring has come with a huge increase in the cost of production,” Geske said.
The U.S. Department of Agriculture in September forecast Missouri’s corn production this year at 473 million bushels, or more than 1 percent above the previous record set in 2004.
“In 2004, we had a bumper corn crop with 467 million bushels. At that time, Missouri’s ethanol production was around 30 million gallons,” Geske said. “Today we are approaching 225 million gallons of ethanol per year and producing more corn than we ever have. I would say things are moving in the right direction.”
Hilgedick, the Hartburg corn farmer, doesn’t share Geske’s brooding pessimism about potential problems with corn prices and says the decline since last spring nixes lingering doubts about whether the nation’s corn farmers can produce enough to satisfy both food and fuel needs
“I don’t have any worries at all” about the ability of corn farmers to produce enough grain to feed people and livestock and power vehicles. “People said we couldn’t grow enough. We proved them wrong. That’s why it’s $3 now and it was $4 in the spring,” Hilgedick said.