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Ethanol Production and Its Impact on American Agriculture

April 07, 2012

Research Report

Number RR-0193

Ethanol Production and its Impact on American Agriculture

April 07, 2012

Research By: Justin Solomon

Research Report

Number RR-0193

Executive Summary

Throughout the past decade, the United States has been focusing more attention and resources into the development of renewable energy sources. Ethanol production has been consistently rising over the past decade. Though ethanol can be produced from various sources of plant matter, corn is most widely used in its production. Why is corn mainly used in the production in ethanol? Being that several strains of hybrid corn seed have been developed to resist drought and pest, along with the overall cellulose content of a corn plant make it a favorable choice for a dedicated energy crop. The problem with this is that corn harvested for ethanol takes away from food for human and animal consumption, thereby increasing overall demand for corn which in turn drives up feed prices. From a farmers standpoint this is a good thing, but for the millions of consumers it can have a negative impact. Throughout my research I will try to use an economist standpoint in how this increased usage of our corn crop for fuel is affecting other sectors of agriculture. I will show some possible methods of how the allocation of other crops available for fuel can help to counteract the rising price of corn that along with how the increased demand for corn to energy is impacting other sectors of agriculture.

What is ethanol, and how is it having an impact on American energy and food prices? Ethanol is actually a by-product by which cellulose in plant matter is been broken down by chemical fermentation, pretty much the same way alcohol for human consumption is produced. Ethanol manufacturing plants use enzymes to break down the cellulose in corn seeds and stocks into sugars and glucose. Once all of the cellulose has been broken down, yeast is added into the heated mash to ferment the sugars into ethanol; which is the technical term for moonshine.

After the ethanol has been fermented and derived from the mash, it is denatured with the use of gasoline to prevent humans from consuming it and possibly injuring themselves. Any plant matter can produce ethanol; the problem lies with abundance and cellulose content. Work is underway to develop enzymes that will both break down cellulose into sugars and ferment them into ethanol. This would further lessen the processing time to produce ethanol thereby increasing overall efficiency of any ethanol producing facility.

What is the reason behind this push for ethanol production in the United States? Quite simply it is because of the increasing global demand for crude oil. Nations with fast growing economies such as China and India are consuming a lot more crude than in the past. This overall increase in global demand has fueled the price increase for gasoline. I have heard in the past that when the average price of a gallon of gasoline in the U.S. reaches four dollars, it really starts to have a negative impact on our economy. With that being said it makes since that Americans along with the federal government are looking into and investing huge sums of capital into the research/development and production of renewable energy sources. But the reason for this report is to find out if it is actually economically beneficial to produce ethanol as an alternative fuel source, or if it just places the burden of higher prices on other things such as food. There is a problem in the fact that there is a limited amount of arable land in the U.S. Out of the enormous amount of land that makes up the U.S., less than half is used for range and cropland. When the production of a certain crop is increased, more land is obviously needed for its cultivation. This takes away land for the cultivation of other crops such as wheat or cotton and soybeans. When the supply of these main crops decreases, the overall demand rises; thus pushing for a rise in price. So who is the real winner in this situation? Why possibly pay a little less for our fuel, but rather pay higher prices for our food and clothing when they are already expensive enough. I am working to find the logic behind the push for ethanol, and whether or not there can be equilibrium in prices.

Since the Energy Policy act of 2005, more incentive has been given for the production and expansion of the ethanol industry. This energy act mandated that 7.5 billion gallons of renewable fuel be added into petroleum fuels. With the government backed energy policy and the continued construction and completion of ethanol production facilities, the expected production capacity could reach 12 billion gallons in just a few years. What does this mean for our national corn crop? To me it means higher demand and a continued rise in food prices for human and animal use. In 2011 nearly a quarter of the corn crop was used for ethanol production, yet ethanol represented only a small portion of the overall fuel burned in the U.S., less than 10% needless to say. Since 2000 the average price per bushel of corn has risen from around $2 to about $6 a bushel. This sharp and steady rise can be contributed to the increased production of ethanol along with inflation. Food prices have been at a parallel with these increased prices. Another factor on how Americas increased usage of its corn crop for energy purposes has brought upon economic changes is in the exportation of corn to other countries. Since there is less corn overall available due to the push for ethanol, the amount available for export has declined. The problem with this is that it takes away from another profitable sector for America. This gives other nations with climates favorable to the cultivation of corn more incentives to produce it; thus possibly eliminating a total market sector for American producers to export.

Though a sector in the global exportation market may be affected directly by American ethanol production, overall the American economy will still benefit; due to the fact that less will be spent on the importation of foreign oil. The cost of foreign oil is a lot more expensive than what the economy could gain by exporting corn. So the economy gains more by importing less oil than it would from exporting corn. Any given producer will respond to any incentives in hope of gaining profit. Farmers looking to plant more corn for a promise of more profit have had a negative impact on Americas soy market. Soybeans, along with corn are a one of Americas most widely cultivated crop. When more land is used for corn production and less for soy, it requires farmers to change their crop rotation practices. Crops become more susceptible to certain plant diseases and pests when annual rotation practices have been changed. Less crop rotation can also take more out of the soil since different crops require different amounts of nitrogen and minerals from the soil.

Corn crops being more susceptible to disease and pest due to a change in rotation practices is only one problem that should be looked at. The decreased amount of soybeans being cultivated also places a higher demand for soy; thus along with corn the market price will

be driven upwards. Being that soy is so widely cultivated; it along with corn plays a major role in Americas food industry. Soybeans contain a high amount of protein, along with corn a large portion of the soybean crop harvested is used to produce oils and the remaining matter is used to feed livestock such as beef or poultry.

Aside from being mostly used for oil production and food for both humans and animals, soybeans are also used as a substitute for wood. Since the hulls of soybeans can be heated and compacted into wood like materials. It can be widely used in the production from anything ranging from home or office furniture to building and flooring materials. Soybeans are also important in the production of biodiesel; this clean burning alternative fuel is non-toxic with fewer emissions, therefore making it safer for the environment as opposed to diesel derived from crude. Every soy product whether it is produced for animal or human consumption along with any soy based building material will see an increase in price. Again this relates back to the increased amount of arable land being used for corn production rather than soy. This could also mean price increases for other crops as well not just soy. Cotton, sorghum, wheat, and any other major crop grown in the U.S. could possibly face price increases as well; all due to imbalances in crop cultivation. There is in fact a list of negative reactions that can occur with the increased cultivation of corn and the decreased cultivation of other vital crops that help support our economy.

Farmers looking to maximize profit can turn to using their range or pastureland for the cultivation of more corn rather than use them for grazing their cattle or raising hay. Less hay production and less room for grazing will have a quick and significant impact of hay prices. These high forage prices give cattle ranchers along with other livestock producers less incentive to continue to raise cattle or build upon their existing heard due to the higher price of hay. The average price per round bale sits anywhere between $90 to $120 dollars a bale, and $10 for a square bale of fertilized coastal hay. Hay prices are most directly affected by climate conditions, droughts like the one Texans suffered through in the summer of 2011 drove hay prices through the roof because there was simply nothing to cut and bale. Hay prices as it is are very susceptible to the amount of annual rainfall; the decreased usage of rangeland for corn production to produce more ethanol will have an even greater impact on hay prices. When ranchers are faced with the burden of paying higher prices for hay, they tend to sell off their cattle; which is exactly what we are currently seeing in Texas.

During tough economic times when many ranchers who do not have the sustenance to provide for their herd sell their livestock, the market is temporarily flooded with livestock available for slaughter.

This causes a temporary drop in meat prices, which for the consumer is a good thing. Once a large amount of cattle have been taken to market and slaughtered, ranchers have fewer if any livestock remaining. The problem with this is that in states such as Texas, beef tends to be an inelastic consumer item. Needless to say that the demand for beef can somewhat remain unchanged. Looking at it again from an economist point of view, high demand and less availability ultimately mean prices will rise.

Being that raising cattle for beef production is a slow, tedious, and risky way to earn profit, many ranchers may feel reluctant to build back their livestock herds after such an economic shock has occurred; thus keeping prices high for a long time. With higher prices for corn and soybeans, along with cottonseed mill which is also widely used for livestock feed, the production of beef and poultry will decline since higher prices for feeding will impact the amount of profit that livestock and poultry producers receive. However the higher prices of animal feed could be slightly offset by the remaining feed grain that has already been processed for ethanol. This matter called distillers grain often comes out of the ethanol processing plant containing high amounts of moisture. This matter is further processed and dried to prohibit the growth of bacteria or mold.

Dried matter is then capable of being distributed to livestock producers nationwide. There is however not enough distillers grain to counteract the rising price for corn; thereby not keeping a comfortable equilibrium in the feed market.

The economic impact of increased corn production for ethanol is widespread throughout agriculture. An agriculture business industry that could be mostly affected by this would be the massive grain elevators that store the corn. Generally grain elevator companies buy corn from local farmers, and then store it until they are able to find a market buyer whether nationally or internally in order to turn out a profit.

If more of our national corn crop is being used for producing ethanol, this takes away from the amount of grain that is available for grain elevator companies to store and sell. Thus taking away from the profit available, this could possibly cause the closure of many grain elevators throughout the corn belt of America. Countless people jobs and lively hoods could be lost due to this. A big outside factor that can have a detrimental impact on grain price rather than human actions is our climate. What happens when a severe drought threatens the yield of the corn crop? The rising rate of ethanol production in the U.S. could make food prices for human and animal consumption more vulnerable to climate conditions. With the concerns of drought along with pest and plant diseases, there are many other factors that directly affect the amount of corn that is able to be brought to harvest. Here are some proposals that I think would help keep corn and other feed/consumer items at a favorable equilibrium. I am not certain but I am sure others have made similar proposals like this, but it interests me so I have made my own attempt at it. One is a balanced allocation of corn and soybeans in the production of ethanol. Soybeans along with corn are more than capable of producing favorable amounts of ethanol. In fact, a study from the University of Tennessee Agricultural Economics Department concluded that for every 56 pound corn bushel, about 2.8 gallons of ethanol is produced and 18.3 pounds can be used for distillery feed grains. And for every 60 pound soybean bushel, around 2.6 gallons of ethanol is made and 45.5 pounds can be used as feed grains.

Looking at the production amount, soybeans to me look like the more favorable choice to plant as a dedicated energy crop. Along with the hull of soybeans being used to produce ethanol, the seed germ can be used for soy oil production. Soy oil is used in consumer items such as cooking oil; which is non-allergenic. Aside with being used for human and animal consumption, soybean oil can be made into-biodiesel as I stated earlier in this report. It only requires a simply process called transesterification. Soybeans however might require more inputs in its cultivation due do the use of fertilizers and herbicides. But it is more diverse in that it can be used for numerous consumer products and renewable fuels; the added input cost is well worth it. Another more possible favorable choice is the cultivation of high energy grasses such as bluestem, switchgrass, or canarygrass. These grasses are fast growing and perennial, so the need for annual plowing and planting is not needed; this means a lot more savings with less fuel being needed for production. These high energy grasses also require less input than soy or corn in that they require little if any applications of fertilizer. An initial application of herbicide may be ideal to keep smaller weeds and vegetation from prohibiting the grass crop from reaching its full potential.

There are several ways that the cultivation of these energy grasses can be beneficial to the producer, consumer, and also the surrounding environment. Currently there are 35 million acres in the United States that are under CRP (Conservation Reserve Program) contract. The Reason for these subsidized contracts to rural landowners is to prevent topsoil erosion along with the improvement in the quality of local bodies of water as well as groundwater. My suggestion is this, free up some of the CRP land so that it can be used to cultivate these high energy grasses. CRP land is spread across the U.S. which means that different species of energy grasses will be needed for the different climate conditions. There are species of energy grass that are more prone to regions with an average cooler climate. Canarygrass for instance thrives in cooler regions; an allotted amount of CRP land in the northern region can be used for its cultivation for use in ethanol production. For the warmer southern regions, switch grass can be grown on CRP lands to also be used in the production of ethanol. Unlike corn, switch grass requires less energy to cultivate while being able to provide five times the amount of energy that is derived from corn in ethanol. In other words, for every 1 unit of energy put into switchgrass you get 5 units of energy back. This is opposed to corn which is around 1 unit of energy required to grow it, and only about 1.4 units of energy you would get back out of it.

This could mean higher profits for farmers due to lower input cost and the increased amount of ethanol that energy grasses produce. This would also help to keep the price of human and animal food at a more stable/favorable price. Some concern may arise from the use of conservation land for the cultivation of high energy grasses. Although a different species of grass would be introduced to the area, these grasses are still a native prairie grass. They would continue to improve on the quality of the soil and surrounding bodies of water just as the common local grasses had been doing. In reality this land will have little human and machinery involvement, but still yield a crop that would provide substantial more energy than a common row crop. This grass would continue to grow after each cutting instead of having to be sowed into the grown every season. Conclusion Of course every action has a reaction; much needed trial and error is still needed in the efficient production of ethanol using various cellulosic plant materials. I think these suggestions are worth looking into for the purpose of economic equilibrium along with environmental factors playing a role as well.