Of all the proposals in President Bush’s State of the Union speech, the call for massive increases in subsidized ethanol production stands the best chance of winning Congressional support. With the campaign season getting under way, both parties are eager to boost federal funds to the Farm Belt.
But even as the president hit the road Wednesday to highlight his plan at an ethanol plant in Delaware, some were already asking: Where is all the corn needed to make that ethanol going to come from?
The Great Corn Rush was already sweeping the Midwest before the White House set its ambitious new targets. The Energy Policy Act of 2005 provided generous subsidies for ethanol production along with increased mandates for its use to replace the fuel additive MTBE, which has been linked to cancer.
As a result, ethanol production has surged. Over 100 ethanol refineries nationwide now produce now than 5.4 billion gallons a year. The 2005 bill had set targets of 4 billion gallons for 2006 and 7.5 billion gallons by 2012. With dozens of additional ethanol plants coming on line in the nest few years, those targets now look comfortably attainable.
So the Bush administration has decided to more than double down its bet. The new target of 35 billion gallons a year by 2017 represents a five-fold increase in ethanol production. That would displace about 15 percent of U.S. gasoline demand.
But is there enough corn out there to meet that goal?
Ethanol producers say they’re confident they can meet the new targets. Higher yields from existing corn growers will support as much as 15 billion gallons a year, according to Don Endres, chief excecutive of ethanol producer VeraSun Energy, which is looking to more than double production in the next 15 months.
“We think there is also another 20 to 30 million acres that could be put into production that would provide enough corn for another 15 billion gallons, so we think we could get to 30 billion gallons on corn,” he said.
But critics of the Bush plan say the numbers just don’t add up.
“Producing 35 billion gallons of ethanol a year would require putting an additional 129,000 square miles of farmland — an area the size of Kansas and Iowa — into corn production, which is not very likely,” said Philip E. Clapp, president of the National Environmental Trust.
Increased demand for corn from ethanol is already straining supplies and pushing prices higher. Corn futures prices recently topped $4 a bushel, the highest price in a decade, raising production costs for livestock producers. The Department of Agriculture earlier this month forecast that by the time this year’s harvest is ready in August, corn in storage will have dwindled to a three-week supply — the lowest level in a decade.
Bush conceded Wednesday that the aggressive targets could put a strain on U.S. corn production.
“There is a constraint, and that is the ethanol use today comes from corn, and we've got hog growers and chicken growers that need corn to feed their animals," Bush said at a facility owned by Dupont Co. "Therefore it's going to be kind of a strain at some point and time on the capacity for us to have enough ethanol."
But the White House says that the plan to boost ethanol production includes "safety valves" that would let the government ease up on renewable requirements "to protect against unforeseen increases in the prices of alternative fuels or their feedstocks," according to briefing materials.
The administration is relying on another “safety value” — a technology to produce ethanol from the cellulose in corn stalks and other plants like switchgrass that can be produced more cheaply than corn. So far, this so-called “cellulosic” process is much more expensive than corn-based ethanol. Major research breakthroughs will be required to make it economically competitive.
"There quite a long learning curve in terms of proving the technology and bringing it into production," said Peter Gray, KPMG's head of corporate finance for energy and natural resources. "It’s still quite a long way from being economic."
Meanwhile, the surge in corn prices has raised the cost of producing ethanol. Higher prices for the natural gas — needed to generate heat to brew ethanol — has also gone up. That has some producers considering delaying or abandoning plans to build more capacity.
"We assume a lower completion rate for planned projects, as high feedstock costs are lowering implied returns which should cause some cancellations and deferments," Credit Suisse said in a recent research report to clients.
The report said that as recently as last July, investors could expect a return of as much as 35-40 percent. Since then, those estimated returns have shrunk to about 5 to 13 percent, according to Credit Suisse.
"The biggest reason that you are seeing projects being delayed has been the cost of building a plant has gone from $1 to $1.25 a gallon to $2 or $2.25," said Monte Shaw, executive director for Iowa Renewable Fuels Association. "That dramatically changes the risk profile on some of these projects."
But the rise in corn prices has a silver lining. Higher market prices means that government price subsidies — used to provide farmers with a guaranteed return — have fallen. On Wednesday, the Congressional Budget Office said American taxpayers will save some $31 billion over the next 10 years, compared to previous estimates, due increased corn demand from ethanol producers.
The CBO now estimates that farm subsidies will cost $10 billion this year and the annual cost "will range between $8 billion and $10 billion over the next decade." That compares to $18 billion spent on farm subsidies in 2006.