Ethanol Industry Facing Challenges

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What a difference a decade makes! In 2000, U.S. ethanol production was less than 2 billion gallons/year, with 54 ethanol plants operating in the country, and many of them being quite small. The estimated ethanol production for 2011 is over 13 billion gallons/year, with over 200 ethanol plants operating in 29 States, with a majority of the ethanol plants in the Midwest. Today, over 85% of the motor fuel sold in the U.S. contains some type of ethanol blend, and the use of ethanol has reduced the need for oil imports from OPEC and other nations by about 445 million barrels/year, which saved the U.S. about $34 billion. In 2010, it was estimated that there were over 7 million “flex-fuel” vehicles in use in the U.S., compared to virtually none a decade ago.

In the first half of the last decade, most everyone was quite positive about the development of the ethanol industry, and there was a tremendous amount of political and public support for ethanol. Most viewed ethanol as a clean-burning fuel that could replace some of the U.S. need for Mideast oil imports, and as a fuel that could be produced domestically from corn grown in the U.S., while creating jobs and helping the rural economy.

Several years ago, a congressional leader at Farmfest stated that the rapidly developing ethanol industry was the best rural economic development tool for the Midwest. According to a recent economic analysis by Cardno ENTRIX, 70,600 people in the U.S. are employed directly in the production of ethanol, and in industries providing goods and services to the industry. As a result of the economic activity generated by U.S. ethanol production, more than 400,000 people have been able to keep their jobs or find new ones. It was also estimated that U.S. ethanol production contributed over $53 billion to the national gross domestic product (GDP), added $36 billion to household incomes, and provided about $12 billion to federal, state and local tax revenue.

USDA is estimating that ethanol production will utilize slightly over 5 billion bushels of corn, or about 40%, of the nearly 13 billion bushels of corn expected to be utilized in the U.S. on 2011-2012. Midwest corn farmers have benefited greatly in recent years from the increased usage of corn for ethanol production, due to a sharp increase in corn prices, with many southern Minnesota grain farmers having near record net farm incomes in 2010. In recent months, cash corn prices have topped $6/bu., after being well below $3/bu. as recently as 2005-2006. Corn prices rose above $4/bu. in 2008, but dropped back to $3-4/bu. until late in 2010.

The higher corn prices have not been welcomed by all sectors of the agricultural industry. The tight corn supplies and higher corn prices have lead to much higher feed costs and tighter profit margins for livestock producers. The higher corn prices have also re-ignited the “food vs. fuel” debate that was quite prevalent in 2008, when corn prices first rose above $4/bu. Many are concerned that consumer food costs will rise rapidly in the next couple of years, and some are concerned with the increasing issue of human hunger in the U.S. and around the world. Ethanol supporters feel that ethanol production is unfairly being totally blamed for the high livestock feed costs, and the rapidly increasing consumer food costs, citing the many other factors that contribute to those cost increases. The ethanol industry does produce nearly 30 million tons of dried distillers’ grains (DDGs), which is a high quality livestock feed source that is fed as an alternative to corn and soybean meal.

The public opinion of ethanol has also changed in the last decade. Even though the ethanol industry has more than accomplished many of the goals that were set out for it a decade ago, public sentiment has seemed to turn quite negative on ethanol production. Many political leaders and the national news media are now blaming ethanol for high food costs, environmental problems, damage to vehicle motors and many other issues. In next week’s column, we will look at some of the current and proposed policy issues surrounding ethanol, and how that might affect the future of ethanol production in the U.S.

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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