Date: December 30, 2007

Author: Sue Kirchhoff

Source: USA Today

WASHINGTON — A broad energy law signed by President Bush this month requires a major increase in corn-based ethanol and other biofuels to combat global warming and reduce U.S. dependence on imported oil. But it won't come without a cost.

The law calls for production of 36 billion gallons of renewable fuel by 2022. That includes 15 billion gallons of corn-based ethanol, about double current production ability. There also are incentives for biodiesel from products such as soybeans and cellulosic fuels from switch grass, wood chips and other sources.  

But the ethanol mandate is drawing the most attention, and contention, as critics from the United Nations to U.S. livestock producers and food processors question whether it makes sense to devote about a third of the U.S. corn crop to fuel when world grain stocks are at a 30-year low and prices at historic highs. 

Wheat and soybean prices have basically doubled, and livestock production costs have shot up as farmers increased corn production in the past year. Even non-food crops such as cotton are affected as U.S. growers switch into more lucrative grain crops. 

The commodity price and supply situation should remain volatile next year, when the energy law foresees 9 billion gallons of U.S. biofuel use, which will have to come largely from corn-based ethanol. 

"The arrival of biofuels means the world grain and oilseeds market has fundamentally changed forever. We have a worldwide biofuel demand," says Michael Whitehead, vice president of Rabobank America, which focuses on the agriculture industry. "That's not going to go away. That's going to mean continued upward price pressures." 

Ethanol prices have swung widely in the last year but have surged since the energy legislation passed. Corn futures prices are up from about $2.50 a bushel a couple of years ago to $4.50 to $4.80. 

The U.S. food price inflation rate jumped from 2.1% in 2006 to 5.3% this year. But that's muted compared with the rate in developing nations where consumers rely more on unprocessed goods and spend a larger share of income to eat. The U.N. warns of food shortages in developing nations. 

Bob Dineen, president of the Renewable Fuels Association, which represents the ethanol industry, says food manufacturers "accustomed to cheap corn" are placing too much of the blame for food price increases on ethanol. He says they are ignoring factors such as drought in important exporting nations, rising worldwide demand for grain and high energy costs. 

He says the industry should have no problem meeting the mandates. "We're already producing 7 billion gallons today, with another 7 billion (in capacity) that is under construction and will be online shortly. There's little question we'll be able to meet the needs." 

But Chris Hurt, Purdue University agricultural economist, says that with production ramping up so quickly, the ethanol industry may not be able to acquire enough corn from the 2008 crop to run at full capacity. 

"At the start of 2006, the ethanol industry had a production capacity of 4.3 billion gallons, and by the end of 2008, that could be up to 13.4 billion," Hurt says. "We had excess world (crop) production capacity that we could draw on at first. That is gone, and ethanol and other biofuels are growing by leaps and bounds." 

The corn supply question partly hinges on export demand and whether the livestock industry can make more use of distillate grains, a byproduct of ethanol, for feed. Jesse Sevcik of the American Meat Institute says distillate grains have some feedstock value but not as much as touted. "There are definitely a number of factors coming into next year that could … make a bad situation worse for livestock and poultry." 

There's also an expected political battle over extending a 51-cents-a-gallon tax credit for blending ethanol with gasoline and preserving a 54-cents-a-gallon import tariff on ethanol. The pressure for biofuels production also intensifies debate over how to increase yields, including use of genetically modified crops.