Ethanol's impact for the future

The impact of the ethanol driven rise in corn prices continues to generate the attention of everyone from members of Congress, to academics, to the end users of these crops, to farmers who are trying to find the mix of crops that will best serve them in the coming year.

Early this summer, two studies that look at the impact of increased demand for ethanol have been released.

The first was produced by the Economic Research Service and the Office of the Chief Economist of the USDA at the request of Senator Saxby Chambliss. The report titled "An Analysis of the Effects of an Expansion in biofuel Demand on U.S. Agriculture" can be found at: http://www.usda.gov/oce/newsroom/chamblissethanol5-8-07.doc. The report examined two scenarios for increased ethanol demand above the amount included in the February USDA 10-year baseline.

One of the conclusions was especially noteworthy. Not surprisingly, with increased prices, exports of corn and soybeans decline. But, "due to generally higher commodity prices, the value of total U.S. exports increases slightly under both scenarios." A significant turn around from attempts over the last 20 years that resulted in lower export revenue as our price was lowered in a futile attempt to increase export quantities.

The study showed a slight decrease in livestock production as producers responded to increased feed costs by reducing animal numbers, resulting in higher farmgate prices. The report notes that "the increase in cash receipts outweighs increases in production expenses in both scenarios." Depending on the scenario, retail meat prices increased 1 to 2 percent above the baseline as the result of lower production levels.

The second study was conducted by the Center for Agricultural and Rural Development (CARD) at Iowa State University. The report titled "Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets" can be found at CARDs Web site: www.card.iastate.edu.

The CARD study tested higher ethanol production levels than the USDA study and accordingly found larger increases in the retail costs of meats.

Commenting on the study findings, J. Patrick Boyle, president and chief executive officer of the American Meat Institute (AMI), one of the study sponsors, commented that we are spending too many agricultural resources-particularly corn-on energy production. On the other hand, it would appear that the biofuel production train has already left the station with the support of wide sectors of the US public.

Through public policy and private investments, we have already made those decisions. According to the Renewable Fuels Association, 118 bio-refineries are in operation, 79 plants are under construction and 8 existing plants are expanding. Increased ethanol production is going to happen.

And once the livestock industry adjusts production, livestock as well as crop farmers will prosper. It is not that the sharp increase in corn demand for ethanol does not cause challenges for the livestock industry. It does.

The first and very real challenge for livestock producers is to survive the short-run, the time before price-increasing production adjustments can be made but ballooned feed bills must be paid. A second major challenge for livestock producers is dealing with the effects of a major shortfall in corn production-this year or in immediate years to come.

Ways to meet the usage demands, expanding the usage to include more diverse materials for ethanol production, and working toward managing corn supplies to cover those possible drought years are problems to be addressed and solved through the years ahead. Not using ethanol is not the answer to our nation's food or energy needs.

Information for the above article taken from comments by Daryll E. Ray, Agricultural Policy Analysis Center, University of Tennessee, Knoxville, TN.