The Nation’s #1 farm economist Wednesday visited with members of the new Senate Ag committee about the intersection between agriculture and energy. Keith Collins, who has been the USDA’s Chief economist for several Agriculture secretaries, gave a status report on biofuels, with some predictions about the increasing pressure on corn and soybeans to serve both food and fuel markets.

Keith Collins’s testimony to the Senate Ag Committee indicated a significant challenge for bio-fuel advocates, if bio-fuels are going to assume a larger share of the US energy demand. With total energy demand expected to grow 30% by the year 2030, Collins believes biofuels will have trouble maintaining their share of the current market, much less being able to assume a larger role.

Focusing on ethanol, Collins provided some current statistics on plants and production, saying “In 2006, an estimated 5 billion gallons of ethanol were produced, and ethanol accounted for 20 percent of the 2006 corn harvest. Renewable Fuels Association data indicate there are now 110 ethanol plants with total capacity of 5.4 billion gallons and another 73 ethanol plants under construction and another 8 facilities expanding. When construction and expansion are completed, ethanol capacity in the United States will be 11.4 billion gallons per year, which is likely to occur during 2008-09.”

He said in the past couple years, the cost of ethanol production has increased significantly because of higher costs of energy, “U.S. Department of Agriculture (USDA) surveys indicate that between 1998 and 2002 the average cost of producing ethanol (excluding capital costs) remained at about 95 cents per gallon. Since 2002, the cost of producing ethanol has increased to the range of $1.45 per gallon due the increased cost of energy (electricity and natural gas) and corn. Each $1 increase in the per bushel price of corn adds about 36 cents per gallon to the production cost of ethanol, assuming no change in the price of co-products and 24 cents per gallon assuming the prices of co-products increase proportionally with the price of corn.”

The $1 per gallon tax credit for biodiesel has helped promote its production, which was only 91 million gallons in 2004, “High diesel prices and new tax incentives continue to spur production. USDA estimates U.S. biodiesel production reached 250 million gallons in 2006, a 173-percent increase from 2005. For the 2005/06 crop year, biodiesel production accounted for 8 percent of soybean oil use; for 2006/07, biodiesel is expected to account for 2.6 billion pounds of soybean oil or 13 percent of total domestic soybean oil use. The 2.6 billion pounds equals the oil extracted from 229 million bushels of soybeans or 7 percent of estimated U.S. soybean production in 2006.” Currently 87 biodiesel plants are operating with 13 expanding capacity and 65 are under construction, putting production at an additional 1.4 billion gallons per year. Collins said production costs are about $2.50 per gallon, so profit margins are thin, even with the tax credit.

Addressing the issue of 2007 acreage, Keith Collins said corn demand will require the equivalent of 85.6 million acres, and would be met, in part, by a further depletion of the carryover. Which Collins said would have an impact on both corn and soybean acreage in the new crop. He said for 2007, November soybean futures are trading at a 2 to 1 ratio with December corn, but that is below the 2.5 to 1 trend in recent years pointing to a expansion of corn acres. But Collins questioned if that will generate enough acres to meet the additional ethanol demand, “Looking ahead to the 2007 crop of corn, it is quite likely, based on current ethanol plant construction, that corn used in ethanol production will rise by more than 1 billion bushels from the 2.15 billion bushels of the 2006 corn crop expected to be used for ethanol. Use of 1 billion bushels, at a trend yield of 152 bushels per acre, would require an additional 6.5 million acres of corn, if corn consumed in other uses remains unchanged from this year’s projected levels.”

Could the challenge be met with increased productivity? Collins said over the past 50 years, the addition of inputs, such as land, has been modest, but the additional yields have resulted from increases in productivity. “Since 1948, corn yields have increased four-fold, from 40 bushels per acre to 160 bushels in 2004 due to fertilizers, better management, technology, and improved crop genetics. It appears corn yields in the past couple of years have moved above the long-term trend and may continue to do so in coming years as well, helping to meet biofuel demand and reduce pressure on corn prices and acreage. Each 5 bushel increase in yield above the current trend level would be the equivalent of adding around 2.5 million acres to corn plantings, enough to produce an additional one billion gallons of ethanol each year.”

The increased pressure ethanol is putting on the corn market will be felt by the pork producer and the pork consumer according to Keith Collins, “A $1 per bushel increase in the price of corn would raise the cost of producing hogs by about $6 per cwt. With hogs selling for a U.S. average of $43 per cwt in December 2006, the cost of production increase would be about 10 percent of the market price. The farm level value of hogs was about 29 percent of retail value of pork in November 2006, so if the higher feed costs were fully passed on to retail over time, a $1 per bushel increase in the price of corn would translate into about a 3 percent increase in the consumer price of pork.”

Collins said poultry producers will be similarly affected, although beef producers will be insulated somewhat by cattle’s ability to consumer higher quantities of distiller’s grains, which hogs and broilers cannot. But with the increased costs for pork and poultry, Collins said production for both would slow during 2007, as a result prices would increase. At the same time, higher prices for corn and soybeans will result in a slowdown of exports, as foreign buyers look to less expensive sources.

USDA Chief Economist Keith Collins also looked at the expansion of ethanol into the motor fuel market, and forecast a slowdown as the 10% ethanol blend reaches its practical limits of market penetration, “In the face of continued production increases, the price of ethanol could even fall below its energy equivalent to gasoline. If corn prices continue to stay strong and ethanol demand growth slows, ethanol profitability would decline and expansion could slow appreciably in several years.” At that point the acreage balance, that had tipped toward corn would tip back, but that would defeat the purpose of ethanol expansion to alleviate the demand on fossil fuels. Collins said the only way around that predicament is to move toward an E-85 blend, with the help of ethanol made from cellulose, not just corn. While that process is a ways off due to the need for improved technologies, he said the US Department of Energy has goal of cellulosic ethanol production costs of $1.07 per gallon by 2012, which would be less than the cost of producing ethanol from corn.

Summary:
The respected USDA Chief Economist Keith Collins, in his Capitol Hill testimony, offered a challenge to Congress and agriculture, saying the growing demand for ethanol, and its impact on prices and production resources will create some economic hardships elsewhere. However, he said improved production technologies, and government assistance to lessen the expense of cellulosic production of ethanol would help soften the economic blow.