The Age, Australia
06-08-07
Bumper corn crop fuels US energy dilemma
IT HAS been a wet spring in Iowa. The corn is about 30 centimetres high. With a
bit of sunshine, in the next month or so, it will be double that.
By September, it will be as tall as Iowa farmer Dave Nelson. A fourth-generation
corn farmer, he has rarely seen it
this good. This year he has switched 70 per cent of his 2000 hectares from
soybeans to corn, and he's already sold most of his crop at a near-record
$US3.40 ($A4) a bushel.
But come October, when the harvesters plough through the fields, some of the
corn won't be going into food products such as corn syrup (widely used as a food
sweetener) or corn starch, it will be headed for America's service stations.
Across America's mid-west, ethanol plants, which convert corn into fuel for cars,
are springing up like crops after rain. According to the US Department of
Agriculture, there are now 110 ethanol plants in the US producing 20 billion litres
a year, with capacity expected to double in the near future.
Hoping to make Iowa their fields of dreams, investors from all over the world are
pouring money into ethanol, betting that oil prices remain high and the US
Government will continue to subsidise the chemical as part of President George
Bush's plan to cut petrol use by 20 per cent over the next 10 years.
Mr Nelson is also chairman of an ethanol company in which a Brisbane-based
group, Global Ethanol, backed by Investec Investment bank, last year invested
$US60 million ($A71 million).
Driven by prices that have doubled in the past two years, farmers have planted a
record 37 million hectares of corn in the past few months.
If America is addicted to oil, then it is starting its rehab in Iowa, the capital of its
corn industry. The state has 28 ethanol refineries, producing 7.2 billion litres a
year.
Although that sounds a lot, it is only about 4 per cent of the fuel sold in the US.
With Iowa's pivotal role as the first poll in the presidential race, it's highly
improbable that Government support will disappear soon.
Ethanol blends of 10 per cent are about 2.6 cents a litre cheaper than straight
petrol, while higher ethanol blends are about 10 cents a litre less. This all sounds
like good news, but there are some unintended consequences.
The ripple effect of America's new infatuation with alternative fuels is being felt
around the world.
Last year ethanol consumed about a fifth of the US corn crop. By next year,
ethanol could consume up to half of the crop, sparking a debate about food v
fuel.
Corn is not just a basic ingredient of many food products, but is also a staple of
livestock feed, and rising prices are being felt through the food chain.
Already, the price of milk in California has risen 12 per cent this year, and there
are predictions that it could rise by another 10 per cent within the next few
months.
Tyson Foods reported a 41 per cent drop in its poultry profits, blaming increased
feed costs. A study released last month by the Iowa State University's Centre for
Agricultural and Rural Development found that demand for ethanol could raise
beef, pork, and poultry prices by more than 4 per cent and egg prices by about 8
per cent.
Merrill Lynch has estimated that if grain prices rise by 30 per cent, livestock
prices will jump 10 per cent.
Corn farmers traditionally rotate corn with soy beans, a practice that helps
manage pests. But the riches in corn have led to fewer soy beans being planted
this year. Already soy prices have jumped in anticipation of smaller supply.
Rick Brehm, the president of Lincolnway Energy, an ethanol plant that started 13
months ago, says that if it comes to a contest between the food and ethanol
industries for the corn crop, food is going to be the winner.
He also believes that higher prices will lead to more crop production, benefiting
farmers and protecting farm land from urban encroachment. (Already, Iowa
farmland has jumped 10 per cent in value.)
The vogue for biofuels such as ethanol led Abdalla al-Badri, the secretarygeneral of OPEC, to threaten this week to cut back on investment in new oil
production, which he said would risk sending the price of oil "through the roof".
Despite its green image, several studies have shown that ethanol produced from
corn has little if any benefit in reducing greenhouse gases.
Sugar-based ethanol, produced by countries such as Australia and Brazil, is
more environmentally friendly, but is stopped from being imported to the US by a
51 cents per gallon tariff.
Can the good times continue to roll? Even Mr Nelson thinks the price of corn is
too high, driven up by investment funds swept along by the ethanol boom.
"It's not driven by fundamentals. The fundamentals are pointing towards a lower
price, because we have plenty of corn. It's the perceived demand. When you talk
actual, we have plenty of corn around right now. We've got a heck of a big crop
coming. Some time we are going to realise that and the price is going to drop."
The industry could also be stopped dead in its tracks should oil drop. Twice in the
past 100 years ethanol has looked set to establish itself as a competitor to petrol,
only to be wiped out by low prices.
The ethanol expansion could eventually stop unless more cars are built that can
run on higher ethanol blends, and on more service stations selling high ethanol
blends such as E85, which has only 15 per cent petrol. Mr Nelson has to drive 70
kilometres to fill up his Chevrolet Impala with E85.
Despite its lack of greenhouse benefits, ethanol is being swept along by a green
image. Not only is it renewable, its production has none of the toxic byproducts of
the petroleum industry. Mr Brehm said: "We understand that we're here not only
because of high gasoline prices, but also because of people wanting to do the
right thing for the environment, burn a cleaner fuel, which is a renewable fuel."
He says that in the long term, there may be better solutions to America's
dependence on fossil fuels, such as hydrogen fuel or electric vehicles. But one of
the benefits of ethanol, blended with petrol, is that it uses all the existing
distribution and retail infrastructure.
"Long-term, there are probably better solutions than ethanol out there, but they
may be 25 or 30 years down the road."
Corn is not just a basic ingredient of many food products, but is also a staple of
livestock feed, and rising prices are being felt through the food chain.
Already, the price of milk in California has risen 12 per cent this year, and there
are predictions that it could rise by another 10 per cent within the next few
months.
Tyson Foods reported a 41 per cent drop in its poultry profits, blaming increased
feed costs. A study released last month by the Iowa State University's Centre
for Agricultural and Rural Development found that demand for ethanol could
raise beef, pork, and poultry prices by more than 4 per cent and egg prices by
about 8 per cent.
Merrill Lynch has estimated that if grain prices rise by 30 per cent, livestock
prices will jump 10 per cent.
Corn farmers traditionally rotate corn with soy beans, a practice that helps
manage pests. But the riches in corn have led to fewer soy beans being planted
this year. Already soy prices have jumped in anticipation of smaller supply.
Rick Brehm, the president of Lincolnway Energy, an ethanol plant that started 13
months ago, says that if it comes to a contest between the food and ethanol
industries for the corn crop, food is going to be the winner.
He also believes that higher prices will lead to more crop production, benefiting
farmers and protecting farm land from urban encroachment. (Already, Iowa
farmland has jumped 10 per cent in value.)
The vogue for biofuels such as ethanol led Abdalla al-Badri, the secretarygeneral of OPEC, to threaten this week to cut back on investment in new oil
production, which he said would risk sending the price of oil "through the roof".
Despite its green image, several studies have shown that ethanol produced from
corn has little if any benefit in reducing greenhouse gases.
Sugar-based ethanol, produced by countries such as Australia and Brazil, is
more environmentally friendly, but is stopped from being imported to the US by a
51 cents per gallon tariff.
Can the good times continue to roll? Even Mr Nelson thinks the price of corn is
too high, driven up by investment funds swept along by the ethanol boom.
"It's not driven by fundamentals. The fundamentals are pointing towards a lower
price, because we have plenty of corn. It's the perceived demand. When you talk
actual, we have plenty of corn around right now. We've got a heck of a big crop
coming. Some time we are going to realise that and the price is going to drop."
The industry could also be stopped dead in its tracks should oil drop. Twice in the
past 100 years ethanol has looked set to establish itself as a competitor to petrol,
only to be wiped out by low prices.
The ethanol expansion could eventually stop unless more cars are built that can
run on higher ethanol blends, and on more service stations selling high ethanol
blends such as E85, which has only 15 per cent petrol. Mr Nelson has to drive 70
kilometres to fill up his Chevrolet Impala with E85.
Despite its lack of greenhouse benefits, ethanol is being swept along by a green
image. Not only is it renewable, its production has none of the toxic byproducts of
the petroleum industry. Mr Brehm said: "We understand that we're here not only
because of high gasoline prices, but also because of people wanting to do the
right thing for the environment, burn a cleaner fuel, which is a renewable fuel."
He says that in the long term, there may be better solutions to America's
dependence on fossil fuels, such as hydrogen fuel or electric vehicles. But one of
the benefits of ethanol, blended with petrol, is that it uses all the existing
distribution and retail infrastructure.
"Long-term, there are probably better solutions than ethanol out there, but they
may be 25 or 30 years down the road."