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on October 7, 2009

Time for compromise on ethanol

The 15-billion-gallon cap on the use of corn for ethanol set to take effect under federal law in 2015 is not ideal from the standpoint of corn users, but it is better than an unlimited increase in the use of corn.

The approaching cap provides the opportunity for a compromise between the producers of grain, the ethanol industry and corn users like the poultry industry.

Ethanol industry’s needs

The ethanol industry needs more stability in prices. In the last few years, ethanol has varied from $3 to $1.40 per gallon, while corn prices ranged from $8 per bushel to $3 per bushel. High corn prices and low ethanol prices have resulted in devastating losses, while low corn prices and high ethanol prices have resulted in astounding gains. All the while the federal blending subsidy remained stubbornly constant.

A better way to subsidize the ethanol industry (if it must be subsidized) is to provide a variable subsidy. A variable subsidy increases as the price of ethanol declines and decreases as the price of ethanol increases. It provides a safety net for ethanol producers for periods of low ethanol prices without putting excessive pressure on the corn supply when ethanol prices are high.

What corn farmers want

Corn farmers want the permitted blend rate of ethanol to be increased. The blend rate is important to them because there is a temporary “blend wall” caused by the reduction in gasoline use in the U.S. Because less gasoline is being used than expected, it is hard to fit the entire mandated amount into 10% of U.S. gasoline. A slightly higher blend rate is needed to fit the mandated amount.

It would make sense to blend at higher rates near the Corn Belt and lower rates far from the Corn Belt, thereby improving the efficiency of the fuel system for everyone. Whether that mandated amount is blended at 10% or at a higher rate, about the same amount of ethanol will be used. It would, therefore, be pointless to argue over the blend rate if a variable subsidy were in place.

Corn farmers also want new markets. If the production of ethanol from corn is capped in a few years as is currently laid out by law, it does not mean that the potential sale of corn will also be capped. On the contrary, the very capping of corn for ethanol will spur increased use of corn in the developing world to produce meat.

Poultry companies need stability

Just like ethanol companies, poultry companies have been damaged by wide swings in the price of corn in the last few years. A steady 15 billion gallons of ethanol after 2015 is a better prospect compared to the mad dash to build ethanol plants in the last 10 years. Poultry companies need what was is laid out in the current renewable fuel standard, a cap on the use of corn for ethanol.

The post-2015 corn market could be upset by the failure of the cellulosic ethanol industry. Despite an additional 56-cent-per-gallon subsidy for cellulosic ethanol on top of the 45 cents paid to corn ethanol, and a looming mandate next year, there is not a single commercial plant operating in the U.S. The reason is that, so far, cellulosic ethanol is far more expensive to produce than corn ethanol. The technology simply does not yet exist and may never exist to produce cellulosic ethanol even with technological mandates from Washington.

If cellulosic ethanol is indeed an awkward failure, corn should not be the backup feedstock to produce the ethanol that cellulosic ethanol would have produced. In other words, no additional corn should be diverted to satisfy mandates for the production of ethanol from cellulosic stock.

Three-point compromise

Combining the needs of corn farmers, ethanol producers and the animal industries, a possible compromise can be devised:

  • Use of corn for ethanol as laid out in the Renewable Fuel Standard – 15 billion gallons cap in 2015 and no substitution of corn for cellulosic ethanol
  • Variable subsidies for ethanol plants to even out their profitability
  • Higher and flexible blend rates to prevent the blend wall      

These ideas were discussed by the author and Rick Tolman earlier this year when it was agreed that it would be fruitful to further explore the subject.

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