With U.S. EPA set to make a decision on a request to waive this year's renewable fuels standard on July 24, members of Congress and interest groups are all weighing in on the future of the RFS. During today's OnPoint, Tom Elam, an agricultural economist with FarmEcon LLC, discusses the impact of last month's Corn Belt flooding on the ability of corn growers to meet short-term food and fuel demands. Elam gives his take on how lawmakers should be addressing the ethanol import tariff and suggests a combination of a scaled-back tariff and rolled-back RFS in order to help bring corn prices down. Elam also discusses how food and fuel issues will play into the 2008 presidential election.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Tom Elam, an agricultural economist from Farm Econ and Farm Econ is an agricultural and food industry consulting firm located near Indianapolis. Tom, thanks for coming on the show.
Tom Elam: Thank you for having me Monica.
Monica Trauzzi: Tom, EPA is currently evaluating whether or not to grant a waiver request to roll back this year's RFS, renewable fuels standard.
Tom Elam: Right.
Monica Trauzzi: It's a long shot that EPA is going to make any changes, but let's talk about the dollars and cents here. What do you believe the tangible impacts of a rollback would be and would we start to see significant differences in commodities prices?
Tom Elam: Well, the mandate, as you know, calls for the use of, according to USDA, approximately 4 billion bushels of the 2008 corn crop. The problem is that this corn crop is going to be significantly smaller than last year's because of less acreage and lower yields. That has caused corn prices to spike, about a week ago, to eight dollars a bushel plus on the Chicago Board of Trade. That is three times the level of just two years ago. Those prices are a combination of a short corn crop and this very high mandate that would call for using over one third of this crop, this reduced crop, for fuel ethanol production. Relaxing the mandate to 4.5 billion bushels, as best I can calculate, would result in a two dollar or so a bushel drop in the price of corn, which would still leave us at record levels prior to this year. We would still be at record high levels. Unfortunately, it would also take a relief measure from the 209 mandate as well, which starts on January 1 at 10.5 billion bushels. That also needs to be reduced if we're going to sustain any lower commodity prices and lower costs for America's meat, poultry, and dairy producers.
Monica Trauzzi: Yeah, because the energy Department says that a waiver for this year wouldn't really do much to bring corn prices down.
Tom Elam: I think it would in the short run, however, as I just said, it would also require a waiver for next year's 10.5 billion gallon RFS to have any long-term impact.
Monica Trauzzi: We had the farmers union on the show a couple of weeks ago. They say that there's plenty of corn to meet this year's fuel demand and food demands. They were on the show talking about the devastating flooding. How do you believe the corn industry, the corn crops, have been impacted by the flooding and do the numbers add up there? Is there enough to meet the demands and going into next year, are the demands going to be able to be met?
Tom Elam: Well, the fact is we really don't know yet because we have a lot of weather in front of us. The estimates are quite variable in terms of what the impact has been on yield as well as acreage. I can tell you that based on what I've seen in Indiana, and I do travel the state quite a bit, we've had a significant reduction from widespread flooding and localized flooding in terms of just fields that are 10 percent lost or 20 percent lost or 100 percent lost. According to the state Department of Agriculture we've lost about a million acres of corn and soybeans. On the yield side, this crop was extremely late going in, which means it's vulnerable during the key pollination season and it's also vulnerable to any kind of an early frost. It's a high risk crop because it was planted so late. By my calculations, if we get a corn yield, we've been running 155 to 160 bushels an acre, if we get a corn yield of 145 bushels an acre, which is a modest reduction from where we've been recently, off the acreage that the USDA is projecting, the amount of corn available for feeding in this country will be at a 25 year low if the RFS is satisfied. So I don't see how the farmers union is saying we're going to have plenty of corn for both food and fuel, when the USDA itself is forecasting a one billion bushel reduction in the amount of corn available for food.
Monica Trauzzi: In a recent statement, EPW chairwoman Senator Boxer said that she believes that stronger incentives are needed to move toward cellulosic and advanced biofuels quickly. And one of the arguments you'll hear from the ethanol industry and the corn growers is that corn ethanol is a necessary step in order to get to these more advanced forms of biofuels and that we can't just skip over this step. So will we be hindering these advanced biofuels if we sort of take a step back from corn ethanol and we start rolling back on mandates? That's a question that the ethanol industry would ask.
Tom Elam: Well, I hear that too, but the technology that these corn- based ethanol plants are employing is thousands of years old. We've known how to make alcohol out of grain since at least the days of the Egyptian pharaoh's if not before. There's no technological breakthrough involved in corn ethanol production. There are significant technological breakthroughs that are needed for cellulosic and biomass ethanol production. The money that we are spending to support the tax credits that we are spending, the $6 billion a year that is going to support this corn based ethanol system that is not resulting in any kind of new technology, it's just a rehash of old technology, would be much better spent working on cellulosic ethanol. And the fact that these plants that had been built had been built largely in the heart of the Corn Belt and if we're going to be using these plants for cellulosic ethanol, they're in the wrong place. They need to be outside the Corn Belt in places where we would grow crops like switch grass on land today that is marginal and not being farmed.
Monica Trauzzi: What's your take on how lawmakers should be addressing the ethanol import tariff? Because that's coming back into discussion now and some unexpected people, like Senator Lugar, have come out and said that we should take a look at the tariff and consider reducing it or eliminating it entirely. How should that be handled?
Tom Elam: Well, the corn based ethanol industry needs to compete for corn based on a level playing field with other users, feed and food users of corn. Today they have a huge three-dimensional advantage. They have the tax credits, today at $0.51, going to $0.45 on January 1. That gives them billions of dollars a year in federal money that doesn't flow to food and feed producers. They have the mandates, which give them an isolated market, the right to buy corn and to turn it into ethanol essentially. And then they're protected from more efficient, lower-cost production out of principally Brazil and that denies that also to American fuel consumers. We really need to attack all three of these in order to have an efficient, market-based biofuels system and for going to have one. And the lowering of that tariff or the absolute elimination of that tariff would have the effect of allowing American consumers to buy lower-cost, more efficiently produced ethanol from Brazil.
Monica Trauzzi: What about the ethanol industry though? Wouldn't they take a hit? Wouldn't even some of the smaller companies that are sort of trying to get into the game now, wouldn't they be really hurt if that tariff was removed?
Tom Elam: At these fuel prices there is demand for ethanol, if it's priced fairly relative to gasoline. The marginal addition of another billion gallons even coming in from Brazil, which is highly improbable, would be very small because of the fact that American fuel producers are struggling to find more affordable sources of fuel. If we could bring in more or less expensive ethanol, it would help us offset these high gas prices to some extent perhaps, reduce our gasoline usage, and there would still be plenty of market there available for the American ethanol producers. The biggest beneficiaries would be Brazilians because they would get to sell at American prices.
Monica Trauzzi: So we would really need to have a combination of efforts here because high gas prices are really impacting consumers as well if we are talking about scaling back the RFS, less biofuels are going to be in circulation then, which means more oil and gas will need to be used.
Tom Elam: Actually, that is very much of a mistaken idea. The fact is that even if you scale back the RFS, we produced 6.5 billion gallons of ethanol in 2007. If you scale back the RFS, we will probably still produce 6.5 billion gallons or more, but the RFS calls for 9 billion gallons, a 50 percent, almost 50 percent increase from last year. The supply of ethanol probably will not go down if we scale back the RFS, versus last year; it would go down relative to what the mandate says, the 9 billion gallons.
Monica Trauzzi: Okay. Former USDA economist Keith Collins recently released a study that said that retail food prices could rise between 23 percent and 35 percent over the next three years. You can't possibly blame ethanol production for that solely. I mean they're --
Tom Elam: Well, first of all, let me correct Keith Collins' statement you just quoted.
Monica Trauzzi: OK.
Tom Elam: What he said was that prices would rise faster, that much faster, not that much. But if we're going to have 6 percent inflation, basically, he saying we have about 7 to 7 1/2 percent inflation in food prices because of ethanol. And, yes, ethanol can have that much of an effect. If I'm right about the price of corn and how that would affect other agricultural commodities, I would agree with Mr. Collins that that is approximately the additional effect we would see on U.S. food prices over the next two to three years.
Monica Trauzzi: How do you see this playing into the presidential election, the campaigns? Is this going to come out as a major issue or are gas prices really going to take the spotlight?
Tom Elam: Well, first of all, I'm guessing that the weak economy is going to be the top issue. Number two will be Iraq and Afghanistan and then number three will be fuel and then behind that food. Those will be the top four issues in this campaign.
Monica Trauzzi: So this will come into play?
Tom Elam: It will come into play, but it's certainly not going to be the top issue.
Monica Trauzzi: All right, it will be an interesting thing to watch.
Tom Elam: It's going to be very interesting, you're right.
Monica Trauzzi: Thanks for coming on the show.
Tom Elam: Thank you.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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