BIOFUELS:

Drought, searing heat reignite food-fuel debate

The U.S. ethanol industry's efforts to win public support for putting more corn-based fuel in gasoline has run into a fierce, unmovable enemy.

Horrible weather.

A withering Midwestern drought has reignited the debate over "food versus fuel" as soaring corn prices -- which the Department of Agriculture says will cause as much as a 4 percent spike in retail food prices next year -- become ammunition for livestock as proof that federal biofuels mandates have failed.

The ethanol industry isn't taking the attacks lightly, aggressively counterpunching claims that its product is at least partly responsible for a 50 percent jump in corn prices since mid-June.

"This is another step of this ongoing campaign of misinformation by a wide variety of groups, unfortunately, that have opposed ethanol policies either because they feel entitled to cheap corn or they don't want to see their market share taken by a growing biofuels market," said Brian Jennings, executive vice president of the American Coalition for Ethanol.

At issue in food versus fuel is whether the demand for ethanol -- driven by a federal mandate -- induces farmers to plant corn for ethanol rather than for food and livestock feed.

The ethanol industry has long disputed the notion, pointing to studies debunking the argument. Critics of ethanol, including livestock trade groups and environmental organizations, point to another set of studies suggesting the opposite.

Scott Irwin, an agricultural economist at the University of Illinois, Urbana-Champaign, said this year's drought could prove critical in the food-fuel fight.

"The level of corn yields is going down very rapidly," Irwin said in an interview. "Really, for the first time we're going to feel the full effects of the vise that we've put ourselves in between food and fuel. It's not at all clear how that is going to be worked out."

Back in 2008, when arguments over corn ethanol's impact on food prices last raged, Congress had just passed an amended renewable fuel standard that called for the nation to annually blend 36 billion gallons of biofuels into the nation's fuel supply by 2022. Fifteen billion of those gallons were to come from corn ethanol.

Food prices spiked in the wake of the mandate. But the $150-a-barrel price being commanded for crude oil then muddied linkages between ethanol and food prices.

Four years later, there has been both an increase in the production of ethanol and in the yearly mandates for ethanol. Current oil prices -- about $89 a barrel -- are lower than they were in 2008, while corn prices are already higher than they were then.

The livestock industry is pointing fingers squarely at ethanol. Last week, a coalition of livestock groups called on Congress to reduce or repeal the renewable fuel standard, and they urged U.S. EPA to invoke its authority to provide a waiver from corn ethanol mandates to provide relief (E&ENews PM, July 19).

"Basically the EPA administrator has the authority to change the mandate, to adjust it in the national interest if there is severe economic harm," said Bill Roenigk, a senior vice president and chief economist at the National Chicken Council. "We certainly feel we're at that stage already."

'Complex set of different indicators'

USDA says half the U.S. corn crop is now rated in "very poor" to "poor" condition. The department recently adjusted its estimates of the fall's corn crop yields from 166 bushels an acre in May to 146 in its latest report released two weeks ago. More than 1,000 counties have been declared primary natural resource disaster areas due to the drought.

Livestock industries have been hit particularly hard, given that corn makes up the bulk of livestock feed; chicken feed, for example, is 70 percent corn by weight. Analysts predict that the largest price increases in retail food will occur in meat, dairy and eggs, rather than in more direct corn-based products like cereal.

The situation has been made worse by an early USDA prediction of record-breaking corn yields of more than 14 billion bushels. Livestock businesses bought into the prediction, Roenigk said, and didn't commit to corn when it was $5 a bushel in the futures market because they were expecting a bumper crop.

Companies will soon start having to adjust production to cover the increased corn prices, Roenigk said.

"The way the RFS [renewable fuel standard] works, it's more or less a fixed demand" for ethanol, said Wally Tyner, an agricultural economist at Purdue University in Indiana. "What it does is forces most of the adjustment onto the livestock producers. The RFS says you will blend 13.2 million gallons. It says nothing about changes in the corn supply."

Ethanol trade groups have reacted harshly to the criticism and slammed any mention of rolling back the mandate.

They maintain that the market will sort itself out, pointing to their own industry as an example: A handful of ethanol plants have idled operations until corn prices decrease. Ethanol production last week was at 796,000 barrels per day, down more than 60,000 barrels per day compared with the last week of June, though production seems to be somewhat leveling out.

Critics of ethanol say that the market is unfairly skewed by the mandate.

Geoffrey Styles, an independent energy consultant, said the drought shows a need to re-examine the standard.

"The biggest point is we're in a very different position today that just a couple of years ago in terms of need for this fuel," said Styles, who worked for Texaco for more than 20 years. "In 2007-2008, we needed every gallon from every possible source. Crude oil prices were going up, even a year ago there was the Libya thing. Today there are new sources of domestic crude, we're importing significantly less because the economy is down -- all of these things suggest there's a lot more flexibility to back off the RFS."

Livestock, oil and environmental groups have long pushed for such a re-examination, or outright repeal, of the standard. They have supported legislation by Rep. Bob Goodlatte (R-Va.) that would put the standard on hold once corn supplies fall below certain levels.

"The drought is just one example of extreme weather," said Marie Brill, a senior policy analyst at ActionAid. "We're hoping that this time we don't only respond to the immediate crisis but talk about policy changes to address food security at its roots and food volatility at its roots."

She added, "We don't blame biofuels for all food prices. It's a complex set of different indicators that come together. Biofuels policy happens to be one of those things that we can change quickly."

Tom Buis, CEO of Growth Energy, criticized the livestock industry and opponents for overstating the amount of the nation's corn production that goes into ethanol. While about 40 percent of corn production goes into ethanol, about one-third goes back into the livestock feed system as distillers grain, bringing the gross percentage down to about 27 percent.

The ethanol industry has blamed a combination of the drought, fuel costs -- crude oil futures are currently trading at $105 a barrel -- and a high amount of speculative activity in the commodity futures markets for the high corn prices.

"The fundamentals don't support nearly $8 corn," the American Coalition for Ethanol's Jennings said. "This is panic-fueled speculation by folks who don't grow a bushel of corn and wouldn't know a tractor if it went over them. ... There's some real suffering going on in many parts of the country. It's really shameless, in my opinion, that groups are exploiting that to suggest we need to rework biofuel policy."

'No legs'

While some estimates say speculative activity is as much as 80 percent of the commodity futures market, the role of speculation in food prices is under debate.

Irwin of the University of Illinois has done studies that have led him to conclude that notion is "utter nonsense."

"The case is very clear that speculation is at most a marginal to negligible impact on the price of food," Irwin said. "The ethanol industry likes to, strangely enough, deflect attention from their industry's impact on the price of corn and foodstuffs by pointing toward speculation."

Regardless of speculation's impact, about 3 cents of every dollar spent at the grocery store accounts for corn costs, Growth Energy says. The rest, it says, can be attributed to energy costs for the transportation, storage, processing and packaging costs of goods, as well as marketing.

The ethanol industry has maintained that the size of the fall's corn crop is still unknown and that USDA predictions are just that: predictions. While the crop will likely be smaller than the original record-breaking estimates, the industry says there is no need to waive any part of the renewable fuel standard.

Yesterday, ethanol groups touted a study showing that waiving the biofuels mandate would have little effect on corn prices (Greenwire, July 26). In an email, Renewable Fuels Association spokesman Matt Hartwig pointed to the more than 800 million gallons of ethanol in storage and 2.5 billion paper renewable credits carried over from last year that are available to refiners to meet the standard's requirements.

"There is ample opportunity for obligated parties to meet the requirements of the RFS even as ethanol production slows," Hartwig said.

The Obama administration has so far signaled that it will maintain the requirements in the renewable fuel standard.

Buis conceded the ethanol industry lost the public messaging war on food versus fuel in 2008. But he said the industry this time is "very much more prepared."

"There's been a lot of analysis done on food versus fuel," he said. "It's a catchy name, but it has no legs."