Thoughts from the Middle of Nowhere

Even though ethanol has been the primary driver in our industry the last couple of years, the beef industry has always been on the outside looking in on the debate. It makes issues like BSE, country-of-origin labeling, industry consolidation and international trade seem trivial by comparison.

Initially, the argument seemed to be over whether ethanol made economic sense, the answer to which is obviously “no” or it wouldn’t require massive subsidization. So ethanol advocates argued that it might make sense down the road, which ethanol opponents couldn’t much refute. It seemed that ethanol’s support came from the no-harm, no-foul mentality – while it might not help, it’s preferable to pay U.S. farmers than sheiks in the Middle East.

The impact on the livestock industries and/or consumers was easily dismissed because most people miscalculated the size of ethanol’s economic impact. But regardless of whether you pick up the Wall Street Journal, Newsweek or USA Today, the storyline about ethanol has changed today.

It’s no longer simply about the golden era for grain producers but rather the huge costs of this policy on society in general. And the past week provided a prime example of how the rhetoric around ethanol is evolving.

Texas Gov. Rick Perry petitioned the Environmental Protection Agency for a 50% waiver from the federal renewable fuels standard (RFS) mandate for ethanol, in order to gain relief from higher food costs. The grain and ethanol industries responded that rising corn is only a small reason for the increase in food prices. That, of course, will always be the case if one looks at processed foods because the commodity inputs are such a small fraction of the cost.

But cattlemen, don’t get too giddy over the prospect that the American people will demand, or our elected officials will act to re-establish, free-market capitalism and move away from buying the votes of one small constituency at the expense of a much larger one. Today’s politicians are weak-kneed when it comes to making the hard decisions. Politicians today no longer advocate the principles that led to our success, but pander unembarrassingly to the culture of consumption that believes there is no real cost as long as that cost can be put off until the next election cycle.

With the prospect of a La Nina drought affecting 2008 production, a 113 bu. national yield (1988 style drought) would push corn prices to $6.42 and only 27% of the ethanol plants could operate and the ethanol production mandate would not be met. If the mandate was enforced (Energy Independence and Security Act), corn prices would reach $7.99 and ethanol plants would require a $6 billion subsidization to continue operating.

Removal of the $0.51-per-gallon blenders credit would have a large impact on corn markets
only if the EISA mandate were also eliminated. With both eliminated, the average price of
corn would drop by about 22%.

Converting corn to ethanol in Iowa not only leads to clearing more of the Amazonian rainforest, researchers report in a pair of new studies in Science, but also would do little to slow global warming—and often make it worse.

"Prior analyses made an accounting error," says one study's lead author, Tim Searchinger, an agricultural expert at Princeton University. "There is a huge imbalance between the carbon lost by plowing up a hectare [2.47 acres] of forest or grassland from the benefit you get from biofuels."

Tilman and his colleagues examined the overall CO2 released when land use changes occur. Converting the grasslands of the U.S. to grow corn results in excess greenhouse gas emissions of 134 metric tons of CO2 per hectare—a debt that would take 93 years to repay by replacing gasoline with corn-based ethanol. And converting jungles to palm plantations or tropical rainforest to soy fields would take centuries to pay back their carbon debts. "Any biofuel that causes land clearing is likely to increase global warming," says ecologist Joseph Fargione of The Nature Conservancy, lead author of the second study. "It takes decades to centuries to repay the carbon debt that is created from clearing land."

Diverting food crops into fuel production leads to ever more land clearing as well. Ethanol demand in the U.S., for example, has caused some farmers to plant more corn and less soy. This has driven up soy prices causing farmers in Brazil to clear more Amazon rainforest land to plant valuable soy, Searchinger's study notes. Because a soy field contains far less carbon than a rainforest, the greenhouse gas benefit of the original ethanol is wiped out. "Corn-based ethanol, instead of producing a 20 percent savings [in greenhouse gas emissions], nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years," the researchers write. "We can't get to a result with corn ethanol where we can generate greenhouse gas benefits," Searchinger adds.

Turning food into fuel also has the unintended consequence of driving up food prices, reducing the access of the neediest populations to grains and meat. "It's equivalent to saying we will try to reduce greenhouse gases by reducing food consumption," Searchinger says. "Unfortunately, a lot of that comes from the world's poorest people."

"We are converting their food into our fuel," Tilman notes. " The typical driver of an SUV spends as much on fuel in a month as the poorer third of the world spend on food."

But the environmental price tag of biofuels now joins the ranks of other, cheaper domestic fuel sources—such as coal-to-liquid fuel—as major sources of globe-warming pollution as well as unintended social consequences. As a result, 10 prominent scientists have written a letter to President Bush and other government leaders urging them to "shape policies to assure that government incentives for biofuels do not increase global warming."

The European Union is already having second thoughts about its policy aimed at stimulating the production of biofuel. Stavros Dimas, the EU environment commissioner, admitted last month that the EU did not foresee the scale of the environmental problems raised by Europe's target of deriving 10 per cent of its transport fuel from plant material.

Amazon deforestation and fires are being aggravated by US farm subsidies, claims STRI’s staff scientist William Laurance.

According to Laurance, whose findings are reported this week in Science (December 14), a recent spike in Amazonian fires is being promoted by massive US subsidies that promote American corn production for ethanol. The ethanol is being blended with gasoline as an automobile fuel.

As rural communities and cattlemen, we should be proud that we're supplying energy to the world, and that cattle can utilize the by-products. While I don't believe ethanol is the permanent answer to replacing energy dependency on foreign oil, it's part of the solution. How high would the price of oil go if we didn't have ethanol to fill the supply gap?

By the way, the October issue of National Geographic had an excellent article on carbon reduction and the true yields of various ethanol substrates used for production.

These factors are forcing a paradigm change in the cattle industry that we must learn to deal with. It is national energy policy and looks to be that way for some time to come.

I am tired of turf protecting the status quo in the cattle industry. As an industry, we should be furious about the lack of world market share we aren't capturing. With the low value of the U.S. dollar, and the cheapest feedstuffs in the world, we should be providing the world with beef.

Instead, we argue over ethanol production. Producer pitted against producer isn't a good thing for the U.S. beef industry. Isn't it time to recognize that things are changing?

Empty shelves in Caracas. Food riots in West Bengal and Mexico. Warnings of hunger in Jamaica, Nepal, the Philippines and sub-Saharan Africa. Soaring prices for basic foods are beginning to lead to political instability, with governments being forced to step in to artificially control the cost of bread, maize, rice and dairy products.

Record world prices for most staple foods have led to 18% food price inflation in China, 13% in Indonesia and Pakistan, and 10% or more in Latin America, Russia and India, according to the UN Food and Agricultural Organisation (FAO). Wheat has doubled in price, maize is nearly 50% higher than a year ago and rice is 20% more expensive, says the UN. Next week the FAO is expected to say that global food reserves are at their lowest in 25 years and that prices will remain high for years.

The price rises are a result of record oil prices, US farmers switching out of cereals to grow biofuel crops, extreme weather and growing demand from countries India and China, the UN said yesterday.

"There is no one cause but a lot of things are coming together to lead to this. It's hard to separate out the factors," said Ali Gurkan, head of the FAO's Food Outlook programme, yesterday.

Last year, he said, US farmers distorted the world market for cereals by growing 14m tonnes, or 20% of the whole maize crop, for ethanol for vehicles. This took millions of hectares of land out of food production and nearly doubled the price of maize. Mr Bush this year called for steep rises in ethanol production as part of plans to reduce petrol demand by 20% by 2017.

Maize is a staple food in many countries which import from the US, including Japan, Egypt, and Mexico. US exports are 70% of the world total, and are used widely for animal feed. The shortages have disrupted livestock and poultry industries worldwide.

"The use of food as a source of fuel may have serious implications for the demand for food if the expansion of biofuels continues," said a spokesman for the International Monetary Fund last week.

The outlook is widely expected to worsen as agro-industries prepare to switch to highly profitable biofuels. according to Grain, a Barcelona-based food resources group. Its research suggests that the Indian government is committed to planting 14m hectares (35m acres) of land with jatropha, an exotic bush from which biodiesel can be manufactured. Brazil intends to grow 120m hectares for biofuels, and Africa as much as 400m hectares in the next few years. Much of the growth, the countries say, would be on unproductive land, but many millions of people are expected to be forced off the land.

However, there are problems developing in the marketplace. Supply chain problems and rising costs are hampering growth in the industry despite an ethanol production subsidy and a federal mandate requiring increased usage of ethanol. There is trouble ahead for companies involved in ethanol production. Several recent studies have poked holes in what many had hoped was the answer to the U.S. reliance on foreign oil, which last week was nearing $90 a barrel. However, according to recent studies, including one released earlier this year by University of Minnesota (UM) researchers and a Congressional Research Service (CRS) Report, there may be more potential risk ahead for the industry.

“We definitely believe that biofuels have a significant potential,” said Jason Hill, lead author of the UM study. But he added that ethanol should not be viewed as “a savior” to our energy problems and its rapid expansion as a motor fuel has its drawbacks, especially if it is dependent on food crops such as corn and soybeans as feedstock.

If every acre of corn were used for ethanol, it would replace only 12.3 percent of the gasoline used in this country, Hill’s study said, adding that the energy gains of corn-produced ethanol are only modest and the environmental impacts significant.

As a fuel source, ethanol, which produces just 25 percent more energy than it requires to make it—is inferior to feedstocks such as sugar cane which is as much as 400 percent more efficient.

It also widely believed by the public that ethanol presents a environmentally friendly option to fossil fuels, however, both the Minnesota and CRS studies found that increased corn production causes the release of nitrogen, phosphorous and pesticides into waterways as runoff from fields. In addition, ethanol, especially at higher concentrations in gasoline, also produces more smog-causing pollutants than gasoline per unit of energy burned, the researchers said. In fact, in terms of alternative fuels, experts point out that biodiesel represents a far better fuel choice than corn- based ethanol.