The ethanol decade
The beginning of the 21st century was tumultuous. We had a presidential election that was a virtual tie and gave us the first glimpse of the polarization of politics that lay ahead. We were attacked by terrorists who used our civilian aircraft against us and caused the nation to strike back against an ill-defined enemy in wars that have stretched our resources for the past eight years. We had a gut-wrenching economic plunge that left many unemployed and many businesses at a standstill. Politically, we swung hard to the left in 2008 and even harder to the right in 2010. In spite of all this and significant natural disasters in this country and around the world, agriculture sits in an enviable position as we arrive at the 10-year mark. The reasons for the change of fortune for crops and livestock are linked to all just mentioned, but the catalyst effect of ethanol set in motion the greatest change the industry has seen since the Soviet grain deal of the 1970s.
Ethanol is simple grain alcohol made from corn, but its rise in production was all politics. Speaker of the House Newt Gingrich kept the fledgling subsidy alive going into the 2000 elections. He had a lot of support from Midwestern politicians, as Sen. Carol Moseley Braun (D-IL) called herself "Queen of Ethanol" as she battled to win the downstate vote. Sen. Charles Grassley (R-IA) never got to be the king, but his support has been unwavering and the results are dramatic. In 2001, many gas stations had signs that said, "No alcohol in our gas." Now they say, "Contains ethanol." The industry produces 10 percent of the automotive fuel supply, or about 13.5 billion gallons each year.
The cumulative impact of this expansion and demand for corn caused other users to bid more for the crop. Weather-related disruptions in 2005, and especially in 2008, caused grain prices to soar. For the first time in memory there was the possibility of running out of wheat and corn. Input prices rose even faster than grain prices, and land and machinery followed.
The elimination of fuel additive MTBE by the Environmental Protection Agency meant that the oil industry had to blend more ethanol into its gasoline to meet the standards of the Clean Air Act, and the energy bills passed by Congress in mid-decade assured ethanol's expansion as blenders had to increase the percentage of ethanol to its present level.
As demand for corn increased, the life science sector of agriculture made its most significant contributions to biotechnology. Traits were stacked so that insect and weed resistance could both be contained in one plant and yields increased each year. Corn growers, seeing more profit from higher production, invested more in new technology and pulled more acres into production, to bin a fall harvest of 13 billion bushels.
It was hard to tell who was the greatest foe of ethanol as the livestock sector was outraged to be deprived of a cheap feed source and fought back viciously against the ethanol subsidies. Big oil had kept the unholy alcohol at bay for 20, years but the incentives and regulations allowed most oil companies to publicly protest and privately profit. The state of California probably put up the strongest battle, even trying to tie ethanol produced in the United States to rain forest destruction in tropical regions.
As with any startup industry, there was boom and bust. The early plants, owned mostly by farmers in rural communities, were able to recapture their investment in a couple of years. The larger companies came in later and expanded so fast that construction of ethanol refineries caused a shortage of laborers for other industries. Then the Midwest flood of June 2008 caused corn prices to spike, and ethanol production became unprofitable. VeraSun had the most disruptive bankruptcy, and several other producers shut down. Farmer ownership began to decline as the profits became less and the temptation to sell their stock became greater. Corporations, some publicly traded, accepted that risk and bought many of the smaller plants. Hedge funds, sensing the volatility and potential profitability of the future market, added a large volume of contracts to the grain trade to the point they were more tightly regulated by the Securities and Exchange Commission.
The last hurrah of the ethanol decade came last month in the lame-duck session of Congress. Against all odds, the ethanol tax credit was extended for one full year at the current level of 45 cents per gallon. Continued demand for corn to produce ethanol and a resurgent livestock industry that utilizes ethanol byproducts may extend five-dollar-plus corn prices into 2012.
Uncertainty lies ahead for an ethanol industry without a tax incentive or an import tariff. The EPA is being sued for allowing a 15 percent ethanol blend in newer cars and is still pending on an overall expansion to 15 percent on all cars made in the last decade. Even though there was a major purge of Congress in November, most of the advocates for homegrown fuel are still in place and may forge an alliance with the idealistic and conservative newcomers.
We started the decade with farmers "Livin' on the LDP" (Loan Deficiency Payment) and later saw "Fourteen Dollar Beans." Those are words from two novelty songs that show the range of emotions and prices in the past 10 years. Farmers are no longer viewed as wards of the state, and direct subsidies are disappearing. "King Corn" became a documentary and food and farming are mainstream and carefully watched by governments around the world.
You may have other reasons for the uptrend in farm prices over the past 10 years. Not everyone benefited, as the fortunes for grain users were far different than those of grain producers, but it cannot be denied that government incentives to produce ethanol caused incredible change in one decade.
Editor's note: Ken Root is an independent agricultural journalist. He was named the 2009 Farm Broadcaster of the Year and was the 2008 winner of the Oscar in Agriculture. He is an Oklahoma native and an experienced print, radio and television journalist. He has spent the last five years as Lead Farm Broadcaster at WHO Radio in Des Moines, Iowa. He and his wife Gail have two adult children and two grandchildren.