Drought Withers U.S. Corn Crop, Heats Debate on Ethanol
Published September 6, 2012
Ethanol has been good to Galva, Iowa. This kernel of a community has grown almost 20 percent since the 2000 census, to 434 people—a growth spurt that locals attribute to a new golden age for corn and their very own ethanol plant, which opened in 2002.
The Galva plant has been a windfall to the area, thanks in part to the Renewable Fuel Standard that was adopted by the U.S. Congress in 2005 and expanded in 2007. The standard mandates that oil refiners blend 13.2 billion gallons of corn-based ethanol into gasoline this year. After years of decline, Galva is seeing a building boom, with new houses and roads. The neighboring town of Holstein recently built a new performing arts center. The ethanol plant was one of the first businesses to contribute, with a $25,000 donation. Plenty of farmers—wealthy corn growers, mostly—also kicked in big sums of money.
“If we didn’t have a thriving ag industry like we have, we wouldn’t be able to do this,” says Rita Frahm, president of the county’s economic development team. “We have performers and visiting opera; kids use it to put on events. It’s a just a whole new level compared to using the gymnasium.”
But this year’s record-breaking U.S. drought, which has blanketed 63 percent of the lower 48, is sparking a food fight over corn.
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Predictions for a bumper crop in May withered 26 percent by August. Scarcity has pushed corn prices to all-time highs. Farmers are plowing under scorched fields, and cornhusks are blowing across roads.
The mandate, meanwhile, amounts to a requirement that 42 percent of this year’s crop be pumped into gas tanks.
This has angered both livestock producers, who rely on corn for feed, and humanitarian groups, concerned about world food costs, because the United States is the world’s largest producer and exporter of corn. Now, all the heat is descending on Washington.
United Nations, Meat Industry Echo the Call
In an op-ed in the Financial Times, José Graziano da Silva, the director-general of the Food and Agricultural Organization of the United Nations, called for “an immediate, temporary suspension of the mandate,” that would “allow more of the crop to be channeled towards food and feed uses.”
Livestock producers upset with the rising cost of feed are piling on—as are the governors of livestock-producing states—in asking the U.S. Environmental Protection Agency to waive the requirement temporarily. That waiver is being considered, with a decision likely by November.
“It would be nice if they mandated that every family had to buy 20 pounds (9 kilograms) of beef every week,” says Bill Hyman, executive director of the Texas chapter of the Independent Cattlemen’s Association. “But they don’t. It’s hard being in a market where one of the products that you rely on has a mandated demand.”
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Some Texas ranchers say they’ve seen the cost of feed double, forcing many to give up on their herds. The state’s livestock industry already was suffering heavy losses from a lingering drought that started in 2005 and has devastated pastures. Thousands of head of cattle have been culled.
Paul Looney, who owns a ranch about 80 miles south of San Antonio, sold his entire herd last fall. Today, he has rebuilt with a herd only 10 percent of what it was, but it’s still too much for his pastureland. That leaves him reliant on more corn-based feed. At 63, Looney is contemplating retirement. “I guess I could pour more feed on them, but at this point, the input cost to get a return is more than what makes sense,” he says. “Anything we can do to lessen the price of corn will lessen the inputs we have for the cattle.”
Even ethanol plants are hurting. They’re selling enough to meet the mandate, but typically, they sell in excess. This summer, expensive and rare corn has left 26 ethanol plants idle—some for more than a year—removing 1.5 billion gallons of production, according to the industry trade group, the Renewable Fuels Association. Many more have slashed production, including Quad County Corn Processors in Galva. Industry experts say many plants are just barely breaking even.
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Still, Frahm speaks for a lot of people in the Corn Belt when she says, politely, “We’d rather not see [the mandate] waived.” That’s indicative of the battle lines being drawn among farmers who sell corn and the ranchers who buy it across the country’s midsection.
Kyle Phillips, a former president of the Iowa Corn Growers Association who farms southeast of Des Moines, acknowledges that the price of corn is high—it has hit a record $8.49 a bushel (up 50 percent over last year’s price)—but says the Renewable Fuel Standard should be lifted only if it is creating a corn shortage. Phillips argues it is not the biofuel requirement but the drought that is creating the shortage. He notes that corn growers this year pushed 95 million acres into production, the most since 1937. At the start of this season, it looked like this ramp-up in planting would suppress corn prices.
“I don’t see why everyone is jumping on the RFS,” Phillips says. “Eight dollar corn is a significant expense, no doubt about it, but no one was going to worry too much about corn farmers if corn was $4 or $5 (a bushel), like it looked it would be in June. We were looking at an excess situation.”
Wedded to Corn Fuel
Separate studies conducted by economists at three universities found that waiving the mandate would have a negligible impact on corn prices this year. Author Bruce Babcock, an Iowa State University economist, says that even if the mandate were waived immediately, it would be at least three months before a price change would hit the market because of sustained demand for ethanol by oil companies. “They have adjusted the way they produce gasoline so it can accept 10 percent ethanol,” Babcock says. “They’re wedded to it.”
That means continued high prices for corn, unless corn becomes so expensive that oil companies calculate it’d be cheaper to alter their processes. “But until that happens, it’s not clear they’ll want to move away even if they’re not forced to.”
Furthermore, the waiver is for only one year, meaning that refineries would simply have to move back to ethanol in a year anyway—a move that oil companies would be loath to make because such conversions are expensive.
As a result, the fight between special-interest groups is moot now that ethanol is effectively built into the U.S. transportation system.
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The car, powered by 10 percent ethanol, has already left the garage.
“You can’t keep people from taking corn and making fuel,” Babcock says. “It’s not the RFS that has got us making ethanol. It was cheap corn and expensive gasoline.” As long as the economics are there, he says, “Someone will build an ethanol plant and turn corn into fuel and make a bunch of money.”