farmgate: Perspectives On The Future Of Ethanol.
Since the farm gate blog was initiated in the late fall of 2005, ethanol has been one of the most powerful dynamics driving farm policy, economics, and marketing in the Cornbelt. On this 1,000th installment of the farm gate blog it is appropriate to take a closer look at how well ethanol is driving this bus and check the roadmap to see what hazards lie ahead.
About this time two years ago the grain market took off with the help of the oil market, which pushed rapidly higher and took both ethanol values and corn prices with it. That spurred bids for acres by other commodities, higher land prices, and more expensive farm inputs. After the oil and economic bubble burst 13 months ago, the ethanol link between the Cornbelt and the economy remains strong. Within this context, ag economist Paul Westcott visits the future of ethanol in the August Issue of Amber Waves electronic magazine published by USDA. He attributes 2007 federal policy to promote biofuels as fostering the demand for more corn, which was easily attained. But he says any future shift of that magnitude will depend on other technologies, both in ethanol production and the capacity of the auto industry to respond to changes in fuel formulation.
In 8 short years, ethanol grew from 1% of the fuel supply to 7% with the help of numerous policy decisions by Congress and state governments. While that was happening, the amount of corn used for ethanol production climbed from 6% to 24% and will level off in the next decade at 30-35%. While most row crop farmers say they are willing to meet that demand, the technical goal is to reach 36 billion gallons of ethanol available for the motor fuel supply by 2022. That includes both corn-based ethanol and biomass-based or cellulosic ethanol. Westcott says the mandate “would require significant expansion of biofuel production and use from current U.S. levels. However, major challenges in both supply and demand may limit future growth in the industry.”
First among the challenges is achieving the technology needed to manufacture cellulosic ethanol, including production, storage, transportation, and refining. Profitability is the key word for farmers, and that will be based on yields, market prices, and production costs. Next among the challenges is the need to change government and automaker policies that limit basic reformulated gasoline to a maximum 10% blend with ethanol, other than variable blends for flexible fueled vehicles. The urgency to change policy stems from the so-called “blend wall,” which will soon be reached. Ten percent ethanol, or E10, will likely reach the saturation point in the market soon, since the motoring public is burning about 140 billion gallons of gasoline per year, and the current US ethanol production will soon be 14 billion gallons, or 10%. Interestingly, economist Westcott says the movement toward improve fuel efficiency “will mean that the volumes of biofuels set forth in the (latest renewable fuels standard) will account for even greater shares of fuel use, necessitating a larger market penetration by biofuels.” However, the mandated production of 36 billion gallons of ethanol by 2022 will be more than enough to achieve a 10% blend of the anticipated 160 billion gallons of motor fuel used by that date.
While E-10 is the dominant ethanol blend, E-85 has the potential to consume much more ethanol, but the number of flex-fuel cars available to use it is quite limited, and E-85 is only about 1% of US fuel consumption. Among the challenges to E-85 is its sparse availability in most US gas stations, metropolitan gas stations do not have room for additional pumps and tanks, and dispensing equipment has been slow to be licensed. Because of those issues, Westcott says there is more opportunity for mid-level blends, such as E-15 or 15% ethanol, and that would generate a demand for as much as 24 million gallons of ethanol annually. The economist says it would have to overcome the challenge of consumer acceptance, and difficulties with small motors and off road engines. While these are negatives, there are activities underway to address the challenges, including research by the USDA and Department of Energy, and federal policies to promote biofuels.
Lurking on the horizon is the federal policy that allows states to be flexible in their requirements for motor fuel, and California’s Air Resources Board has taken a dim view of ethanol, by alleging it causes the loss of soil carbon in South America. In brief, ethanol critics say is pushes corn production up, soybean production down, and the result is more tillage for Brazilian soybean fields. The California standards are even being considered for implementation by other states including Illinois, which would diminish ethanol use—particularly that made from corn.
Summary:
Ethanol provided high levels of octane to the grain markets in 2007 and 2008, but the recession and the softer oil market depressed ethanol values and corn prices. Nevertheless, federal policy and research support for biofuels will keep ethanol as the prime alternative to hydrocarbon fuels as ethanol begins to shift its feedstock from corn to biomass products. In the meantime, the 10% ethanol blend is reaching a ceiling or “blend wall” causing proponents to push for the maximum to be raised to 15% ethanol in reformulated motor fuel. Some environmental challenges remain in the future of ethanol, however its current path retains its dynamic nature in the corn market.
Posted by Stu Ellis on August 24, 2009 12:43 AM to farmgate