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Ethanol recall

By Ken Root

I’m going to call it early: The Renewable Fuel Standard is going to be eliminated by Congress and the ethanol industry is going to have to swim with the sharks in the marketplace. I’d be glad to be wrong but I base it on two factors: All good things come to an end, and we tend to cut off our nose to spite our face.

The anti-corn ethanol forces have combined with the anti-biofuels forces and have a bill in Congress that may well end the requirement that 10 percent of our liquid fuel supply come from alternative sources. Livestock producers have screamed since the price of corn went up, and someone has to pay for their dismay. Grocery interests needed to blame someone for rising costs, humanitarian interests connect higher food prices to alternative uses of corn, and the petroleum industry is determined not to give up market share to any competitor.

The political miracle of ethanol is a case study that should be in every business school in America. The industry would not exist if it weren’t for the actions of politicians in the late 1990s, who were greasing the skids for presidential candidates campaigning in the Midwest. The phenomenal bravery of farmers and small-town investors to front the money to build the first generation of ethanol refineries showed that entrepreneurial spirit is alive in rural America. The power of the farm lobby to get the renewable fuel standard included in a comprehensive energy bill showed political savvy and clout far beyond what is normally expected. Finally, the expansion of the ethanol industry to reach thirteen billion gallons of annual production and hit the 10 percent blend wall is a tribute to the dynamics of business and technology and the capitalist marketplace.

But there were sectors of agriculture that saw a dramatic change in the cost of their feedstock and began to align with each other and any other interest that would sympathize with their plight. That alliance, holy or not, is now supporting HR 1461: “To Repeal the renewable fuel program of the Environmental Protection Agency.”

Let’s say the repeal is successful. What happens next? Again, conjecture from me, but based on as much real-world economics as I can muster. It all comes down to supply and demand. Not anger, not contempt but to the bottom line price of corn. To bring the price down, farmers can produce a big crop this fall. It could be as much as four billion bushels large than the final tally of 2012. Also, for demand to diminish from one or more of the traditional areas of feed usage, exports or ethanol production.

In the past six years of high corn prices, livestock producers have become more efficient. Pork and poultry can move their supply up or down quite quickly but the beef sector has a much longer cycle. All three are ready to pounce on cheaper feed and it will likely result in great production of animal protein to sell into the domestic and world market.

Corn exports have been at record value but not record quantity. It appears that buyers have the money and desire to purchase more, especially at lower price levels.

Ethanol is the wild card. Will refiners buy it if they are not required to use it? This brings in the EPA and its air quality rules for gasoline production. The Clean Air Act isn’t going to be relaxed, so the requirement will remain to have an oxygenate of some type in gasoline to meet emissions standards. I don’t think any additive is going to be cheaper than ethanol, so demand will still be there for some quantity.

What about new uses for corn and new marketing strategies by current users. Cheaper corn could be channeled into plastics and other non-traditional uses and ethanol producers could vertically integrate and start selling their own product in the retail market.

If the RFS is repealed there will be other impacts. The value of land would probably flatten out and decline as profitability of corn production declines. Machinery and input costs would follow suit.

John Deere is sending out vibes that their profits will plunge this year. This could be based on the prospect of a bigger harvest, and lower prices, or the reality that farmers have so much new equipment that they just can’t justify buying much more to keep from paying taxes.

If the RFS goes away, there will be short-term joy from livestock interests as well as food processing and retailing. Those who produce corn will likely see an emotional downturn in prices and then a period of reaction to real economic events such as world demand, greater domestic livestock production and less corn production.

The big winner will be the oil industry who will finally prevail against government and competitors who had to get a legislative mandate to gain a sliver of their market. Domestic oil and gas production will be cited as the future security for the nation. But watch the price of gasoline to see if it goes up or down.

Finally, the taxpayer could also be on the hook as sharply lower corn prices will reinstate price supports that prop up production and result in greater government spending.

It was a good run. It was the longest period of prosperity in agriculture in modern history. A lot of corn farmers now have assets that exceed their wildest dreams. Small communities had a thriving local business that refined corn into ethanol.

The next step is realigning the ethanol industry into one that exports or blends and sells directly to consumers. There will be winners and losers, as capitalism always requires. If the RFS is repealed, then each American will have to determine whether it is good or bad for government to create an artificial business environment that favors one sector over another.

Editor’s note: Ken Root has been an agricultural reporter for 37 years. Root now does daily radio and television programming and is a columnist. He can be reached at kenroot@gmail.com.

Date: 4/22/2013

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