Copyright © 2007 Earth Policy Institute
DISTILLERY DEMAND FOR GRAIN TO FUEL CARS VASTLY UNDERSTATED
World May Be Facing Highest Grain Prices in History
Investment in fuel ethanol distilleries has soared since the late-2005 oil price hikes, but data collection in this fast-changing sector has fallen behind. Because of inadequate data collection on the number of new plants under construction, the quantity of grain that will be needed for fuel ethanol distilleries has been vastly understated. Farmers, feeders, food processors, ethanol investors, and grain-importing countries are basing decisions on incomplete data. (1)
The U.S. Department of Agriculture (USDA) projects that distilleries will require only 60 million tons of corn from the 2008 harvest. But here at the Earth Policy Institute (EPI), we estimate that distilleries will need 139 million tons—more than twice as much. If the EPI estimate is at all close to the mark, the emerging competition between cars and people for grain will likely drive world grain prices to levels never seen before. The key questions are: How high will grain prices rise? When will the crunch come? And what will be the worldwide effect of rising food prices? (2)
One reason for the low USDA projection is that it was released in February 2006, well before the effect of surging oil prices on investment in fuel ethanol distilleries was fully apparent. Beyond this, USDA relies heavily on the Renewable Fuels Association (RFA), a trade group, for data on ethanol distilleries under construction, but the RFA data have lagged behind movement in the industry. (3)
We drew on four firms that collect and publish data on U.S. ethanol distilleries under construction. RFA is the one most frequently cited. The other three firms are Europe-based F.O. Licht, the publisher of World Ethanol and Biofuels Report; BBI International, which publishes Ethanol Producer Magazine; and the American Coalition for Ethanol (ACE), publisher of Ethanol Today. (4)
Unfortunately, the lists of plants under construction maintained by RFA, BBI, and ACE are not complete. Each contains some plants that are not on the other lists. Drawing on these three lists and on biweekly reports from F.O. Licht, EPI has compiled a more complete master list. For example, while we show 79 plants under construction, RFA lists 62 plants. (We welcome any information that will improve this list, which can be viewed at www.earthpolicy.org/Updates/2007/Update63_data.htm.) (5)
According to the EPI compilation, the 116 plants in production on December 31, 2006, were using 53 million tons of grain per year, while the 79 plants under construction—mostly larger facilities—will use 51 million tons of grain when they come online. Expansions of 11 existing plants will use another 8 million tons of grain (1 ton of corn = 39.4 bushels = 110 gallons of ethanol). (6)
In addition, easily 200 ethanol plants were in the planning stage at the end of 2006. If these translate into construction starts between January 1 and June 30, 2007, at the same rate that plants did during the final six months of 2006, then an additional 3 billion gallons of capacity requiring 27 million more tons of grain will likely come online by September 1, 2008, the start of the 2008 harvest year. This raises the corn needed for distilleries to 139 million tons, half the 2008 harvest projected by USDA. This would yield nearly 15 billion gallons of ethanol, satisfying 6 percent of U.S. auto fuel needs. (And this estimate does not include any plants started after June 30, 2007, that would be finished in time to draw on the 2008 harvest.) (7)
This unprecedented diversion of the world’s leading grain crop to the production of fuel will affect food prices everywhere. As the world corn price rises, so too do those of wheat and rice, both because of consumer substitution among grains and because the crops compete for land. Both corn and wheat futures were already trading at 10-year highs in late 2006. (8)
The U.S. corn crop, accounting for 40 percent of the global harvest and supplying 70 percent of the world’s corn exports, looms large in the world food economy. Annual U.S. corn exports of some 55 million tons account for nearly one fourth of world grain exports. The corn harvest of Iowa alone, which edges out Illinois as the leading producer, exceeds the entire grain harvest of Canada. Substantially reducing this export flow would send shock waves throughout the world economy. (9)
Robert Wisner, Iowa State University economist, reports that Iowa’s demand for corn from processing plants that were on line, expanding, under construction, or being planned as of late 2006 totaled 2.7 billion bushels. Yet even in a good year the state harvests only 2.2 billion bushels. As distilleries compete with feeders for grain, Iowa could become a corn importer. (10)
With corn supplies tightening fast, rising prices will affect not only products made directly from corn, such as breakfast cereals, but also those produced using corn, including milk, eggs, cheese, butter, poultry, pork, beef, yogurt, and ice cream. The risk is that soaring food prices could generate a consumer backlash against the fuel ethanol industry. (11)
Fuel ethanol proponents point out, and rightly so, that the use of corn to produce ethanol is not a total loss to the food economy because 30 percent of the corn is recovered in distillers dried grains that can be fed to beef and dairy cattle, pigs, and chickens, though only in limited amounts. (12) They also argue that the U.S. distillery demand for corn can be met by expanding land in corn, mostly at the expense of soybeans, and by raising yields. (13) While it is true that the corn crop can be expanded, there is no precedent for growth on the scale needed. And this soaring demand for corn comes when world grain production has fallen below consumption in six of the last seven years, dropping grain stocks to their lowest level in 34 years. (14)
From an agricultural vantage point, the automotive demand for fuel is insatiable. The grain it takes to fill a 25-gallon tank with ethanol just once will feed one person for a whole year. Converting the entire U.S. grain harvest to ethanol would satisfy only 16 percent of U.S. auto fuel needs. (15)
The competition for grain between the world’s 800 million motorists who want to maintain their mobility and its 2 billion poorest people who are simply trying to survive is emerging as an epic issue. Soaring food prices could lead to urban food riots in scores of lower-income countries that rely on grain imports, such as Indonesia, Egypt, Algeria, Nigeria, and Mexico. The resulting political instability could in turn disrupt global economic progress, directly affecting all countries. It is not only food prices that are at stake, but trends in the Nikkei Index and the Dow Jones 500 as well. (16)
There are alternatives to creating a crop-based automotive fuel economy. The equivalent of the 2 percent of U.S. automotive fuel supplies now coming from ethanol could be achieved several times over, and at a fraction of the cost, by raising auto fuel efficiency standards by 20 percent. (17)
If we shift to gas-electric hybrid plug-in cars over the next decade, we could be doing short-distance driving, such as the daily commute or grocery shopping, with electricity. If we then invested in thousands of wind farms to feed cheap electricity into the grid, U.S. cars could run primarily on wind energy—and at the gasoline equivalent of less than $1 a gallon. The stage is set for a crash program to help Detroit switch to gas-electric hybrid plug-in cars. (18)
It is time for a moratorium on the licensing of new distilleries, a time-out, while we catch our breath and decide how much corn can be used for ethanol without dramatically raising food prices. The policy goal should be to use just enough fuel ethanol to support corn prices and farm incomes but not so much that it disrupts the world food economy. Meanwhile, a much greater effort is needed to produce ethanol from cellulosic sources such as switchgrass, a feedstock that is not used for food. (19)
The world desperately needs a strategy to deal with the emerging food-fuel battle. As the leading grain producer, grain exporter, and ethanol producer, the United States is in the driver’s seat. We need to make sure that in trying to solve one problem—our dependence on imported oil—we do not create a far more serious one: chaos in the world food economy. (20)
Copyright © 2007 Earth Policy Institute
DATA:
Fuel Ethanol Distilleries in Production and under Construction in the United States by State (table)
Fuel Ethanol Distilleries in Production in the United States (table)
Fuel Ethanol Distilleries under Construction in the United States (table)
Fuel Ethanol Distilleries under Expansion in the United States (table)
U.S. Corn Production and Use for Fuel Ethanol, 1980-2006, with Projection to 2008 (figure and table)
U.S. Corn Use for Fuel Ethanol and for Export, 1980-2006 (figure)
ENDNOTES:
1) For more information, see Lester R. Brown, “Exploding U.S. Grain Demand for Automotive Fuel Threatens World Food Security and Political Stability,” Eco-Economy Update (Washington, DC: Earth Policy Institute (EPI), 3 November 2006). Late-2005 oil price hikes in U.S. Department of Energy (DOE), Energy Information Administration (EIA), “Spot Prices for Crude Oil and Petroleum,” data set, at tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm, updated 20 December 2006.
2) U.S. Department of Agriculture (USDA), Office of the Chief Economist, World Agricultural Outlook Board, USDA Agricultural Baseline Projections to 2015 (Washington, DC: February 2006), p. 36. USDA projection for corn for fuel alcohol use in the 2008/2009 crop year is 2,350 million bushels, or 59.6 million tons. EPI estimate posted on-line at www.earthpolicy.org/Updates/2007/Update63_data.htm and calculated from the following sources: F.O. Licht, World Ethanol & Biofuels Report, various issues (25 October 2005–14 December 2006); Renewable Fuels Association (RFA), “Ethanol Biorefinery Locations,” at www.ethanolrfa.org/industry/locations, updated 29 December 2006; BBI International, “Plant List,” Ethanol Producer Magazine, at www.ethanolproducer.com/plant-list.jsp, updated 28 December 2006; American Coalition for Ethanol, “Ethanol Plants” at www.ethanol.org/productionlist.htm, updated 19 December 2006; and additional industry sources. Archer Daniels Midland distillery capacities are estimates from Center for Agriculture and Rural Development, Iowa State University, “Ethanol Plant Data,” at www.card.iastate.edu/research/bio/tools/ethanol.aspx, updated 7 December 2006.
When sources differed on distillery status, EPI confirmed the situation with industry sources and removed inaccurate listings. For example, several plants classified by RFA as “under construction” were removed from the EPI compilation after the plants confirmed that construction had not yet begun.
Corn consumption figures were calculated with the assumption that a bushel of corn yields 2.6 gallons of ethanol for plants currently producing and 2.8 gallons of ethanol in newer plants currently under construction, per industry statistics. A small share of these distilleries may use feedstock other than corn, including sorghum, wheat starch, and brewery waste.
3) USDA, Office of the Chief Economist, World Agricultural Outlook Board, USDA Agricultural Baseline Projections to 2015 (Washington, DC: February 2006); use of RFA data in USDA projections confirmed by Paul Westcott, USDA, Economic Research Service (ERS), discussion with Janet Larsen, EPI, 18 December 2006, and cited by Keith Collins, Chief Economist, USDA, in Statement Before the U.S. Senate Committee on Environment and Public Works (Washington, DC: 6 September 2006). RFA membership available at www.ethanolrfa.org/about/membership/documents/Membershiplist_013.pdf, updated 19 December 2006. RFA data available online at www.ethanolrfa.org/industry/locations, last update on 29 December 2006.
4) Widespread use of RFA data confirmed by Alan Baker, agricultural economist, ERS, USDA, Washington, DC, by Paul Westcott, agricultural economist, ERS, USDA, by Anthony Radich, analyst, DOE, EIA, Washington, DC, discussions with Janet Larsen, EPI, 13–18 December 2006, by Tien Nguyen, DOE, Office of Planning, Budget and Analysis, Washington, DC, discussion with Elizabeth Mygatt, EPI, 18 December 2006, by William I. Tierney, Jr., analyst, JS&A, Washington, DC, e-mail to Janet Larsen, EPI, 18 December 2006, and by on-going literature reviews by EPI. RFA figures for ethanol construction and expansion also cited in Collins, op. cit. note 3. For more information on the individual organizations, see American Coalition for Ethanol, at www.ethanol.org, or Ethanol Today, at www.ethanoltoday.com; BBI International, at www.bbibiofuels.com, or Ethanol Producer Magazine, at www.ethanolproducer.com; F.O. Licht, World Ethanol and Biofuels Report, at www.agra-net.com/portal/puboptions.jsp?Option=menu&pubId=ag072; Renewable Fuels Association, at www.ethanolrfa.org.
5) EPI estimate, op. cit. note 2. As noted earlier, several distilleries listed on RFA’s “Under Construction” list that were confirmed as not under construction were removed from the EPI list.
7) Number of plants in the planning stages is EPI estimate using industry statistics. According to Heather Schoonover and Mark Muller, Staying Home: How Ethanol Will Change U.S. Corn Exports (Minneapolis, MN: Institute for Agriculture and Trade Policy, December 2006), p. 4, at least 150 plants were in the planning stages as of 30 November 2006. This report cites data compiled from RFA, Ethanol Producer Magazine, and “various news articles.” More than 300 proposed plants are mentioned in Chad E. Hart, “Feeding the Ethanol Boom: Where Will the Corn Come From?” Iowa Ag Review, fall 2006, pp. 4–5.
Estimated ethanol draw on 2008 corn harvest (1 September 2008–30 August 2009) assumes a 14-month distillery construction time, meaning that distilleries completed by 30 June 2007 will draw from the entire 2008 harvest. The total draw was calculated by adding the ethanol capacity of plants currently in production, plants currently under construction, and plants projected to start construction between January and June 2007. New construction starts were estimated by EPI by projecting data from F.O. Licht, op. cit. note 2, from the last half of 2006 and adding an additional 10 percent to account for plants not covered by this publication (this is believed to be a conservative calculation); corn-to-ethanol conversions, op. cit. note 2. As noted in the text, this estimate does not include any plants started after 30 June 2007 that would be finished in time to draw on the 2008 harvest for part of the year.
USDA projections from USDA, op. cit. note 2. Share of U.S. automotive fuel needs calculated by EPI using estimated motor vehicle consumption of close to 10 million barrels of oil per day or about 150 billion gallons per year from DOE, EIA, “Transportation Sector Key Indicators and Delivered Energy Consumption,” table in Annual Energy Outlook 2007 (Washington, DC: 2007), early release data at www.eia.doe.gov/oiaf/aeo/index.html, downloaded 2 January 2007, and an assumed ethanol energy content of two thirds that of gasoline, as cited in industry sources, including Oak Ridge National Laboratory, Bioenergy Feedstock Development Programs, “Bioenergy Conversion Factors,” at bioenergy.ornl.gov/papers/misc/energy_conv.html, viewed 2 January 2007.
8) Historical wheat, rice, and corn prices available from International Monetary Fund (IMF), World Economic Outlook Database, at www.imf.org/external/pubs/ft/weo/2006/02/data/index.aspx, September 2006; Paul C. Westcott and Linwood A. Hoffman, Price Determination for Corn and Wheat: The Role of Market Factors and Government Programs (Washington, DC: USDA, ERS, Market and Trade Economics Division, July 1999); futures prices from Kevin Morrison and Lucy Warwick-Ching, “Wheat Prices Soar as Beetles and Heatwaves Hit Harvests,” Financial Times, 11 October 2006; Joe Poncer, “Corn Jumps to a 10-Year High On Concern Over U.S. Crop Size,” Wall Street Journal, 3 November 2006.
9) USDA, World Agricultural Supply and Demand Estimates (Washington, DC: 11 December 2006); corn production by state in USDA, National Agricultural Statistics Service, Crop Production: 2005 Summary (Washington, DC: January 2006), pp. 5–6, at usda.mannlib.cornell.edu/reports/nassr/field/pcp-bban/cropan06.pdf.
10) Robert Wisner, communication with Janet Larsen, EPI, 2 January 2007, data updated 29 December 2006 in preparation for Iowa State University “Crop Advantage” seminar (Cedar Rapids and Burlington, IA: 4–5 January 2007); Wisner’s data include corn processed for fructose, corn oil, cereal, starch, and other food and industrial products as well as ethanol. Historical corn production data for Iowa at USDA, National Agricultural Statistics Service, “Quick Stats,” Agricultural Statistics Database, at www.nass.usda.gov/QuickStats/Create_Federal_Indv.jsp, viewed 27 December 2006.
11) Price relationship from Chad E. Hart, agricultural economist at Iowa State University in Ames, cited in Ben Harder, “Demand for Ethanol May Drive Up Food Prices,” Science News, vol. 170, no. 4 (22 July 2006).
12) Distillers dried grains (DDG) recovery of 17 pounds per bushel of corn (one bushel of corn is equal to 56 pounds) in Collins, op. cit. note 3, p. 2. According to Collins, “Generally, animal nutritionists recommend a maximum of 25 percent DDGS for dairy feed rations on a dry matter basis and 40 percent DDGS for fed cattle. Monogastric poultry and hog rations can include up to 5–15 percent DDGS and are limited because of the high fiber content of DDGS.”
13) See, for example, materials from RFA, www.rfaethanol.org; National Corn Growers Association, www.ncga.com.
14) USDA, Production, Supply & Distribution, electronic database, www.fas.usda.gov, updated 13 October 2006.
15) Grain required to fill SUV tank in Lester R. Brown, “Supermarkets and Service Stations Compete for Grain,” Eco-Economy Update (Washington, DC: EPI, 13 July 2006), based on the following: Conservatively, a bushel of corn yields 2.5 gallons of ethanol. Given this, a 25-gallon gas tank requires 10 bushels, or 560 pounds, of corn. This is well above the minimum human consumption level for survival (roughly one pound of grain per day, or 365 pounds per year, calculated by EPI from World Food Program and United Nations High Commissioner for Refugees, WFP/UNHCR Guidelines for Estimating Food and Nutritional Needs in Emergencies (Rome: 1997)). The world consumed 2 billion tons of grain in 2005. With a global population close to 6.5 billion, this amounted to roughly 308 kilograms, or 677 pounds, per person per year, slightly above the 560 pounds needed to fuel the 25-gallon gas tank. India, in contrast, used 192 million tons of grain in 2005, or 383 pounds per person, well below the amount needed to fill a gas tank. Population figures for per person calculations from United Nations, World Population Prospects (New York: February 2005). Using the conversion for new plants coming on-line with yields closer to 2.8 gallons of ethanol per bushel, a 25-gallon tank will use 500 pounds of corn, still above minimum food consumption levels.
Grain production and consumption figures from USDA, World Agricultural Supply and Demand Estimates, op. cit. note 9; share of U.S. automotive fuel needs calculated using DOE, op. cit. note 7, assuming ethanol conversion rate of 110 gallons per ton and energy content two thirds that of gasoline.
16) 800 million motor vehicles from Ward’s Communications, Ward’s World Motor Vehicle Data 2004 (Southfield, MI: 2004), p. 238; grain importing countries from USDA, World Agricultural Supply and Demand Estimates, op. cit. note 9; USDA, op. cit. note 14.
17) Share of automobile fuel calculated from DOE, EIA, op. cit. note 7, and from F.O. Licht, “Ethanol: World Production, by Country” (table), World Ethanol and Biofuels Report, vol. 4, no. 17 (9 May 2006), p. 395.
18) The California Cars Initiative (CalCars), “All About Plug-In Hybrids (PHEVs),” at www.calcars.org/vehicles.html, viewed 27 December 2006. According to CalCars, “Using the average U.S. electricity rate of 9 cents per kilowatt-hour (kWh), 30 miles of electric driving will cost 81 cents. If we optimistically assume the average US fuel economy is 25 miles per gallon, at $3.00 gasoline this equates to 75 cents a gallon for equivalent electricity.” With reduced nighttime electricity rates, the cost falls even more dramatically. For more information on pairing plug-in hybrid electric vehicles with electricity produced by wind, see “Hybrid Cars and Wind Power,” in Lester R. Brown, Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble (New York: W. W. Norton & Company, 2006), pp. 191–93.