Wednesday, April 30, 2008

Washington Post on US corn ethanol

Siphoning Off Corn to Fuel Our Cars
As farmers feed ethanol plants, a costly link is forged between food and oil. By Steven Mufson
Washington Post Staff Writer
Wednesday, April 30, 2008; Page A01
Erwin Johnson picks up a clump of the dark, rich soil that he has farmed
for 35 years, like his father and grandfather before him. In a few months,
this flat expanse of northern Iowa will be crowded with corn ready to be
trucked to market.
A year ago, that market got a little closer -- and a lot better. Instead
of sending his corn to a barge company to be shipped down the Mississippi
River for export, Johnson now loads it into an open truck and sends it two
miles up the gravel road to a hulking new ethanol distillery that he can
see from his field. The plant is paying him $5.50 or more a bushel, more
than twice as much as Johnson could get just a couple of years ago.

"This is a fantastic time to be farming," Johnson says. "I'm 65, but I
can't quit now."

Across the country, ethanol plants are swallowing more and more of the
nation's corn crop. This year, about a quarter of U.S. corn will go to
feeding ethanol plants instead of poultry or livestock. That has helped
farmers like Johnson, but it has boosted demand -- and prices -- for corn
at the same time global grain demand is growing.

And it has linked food and fuel prices just as oil is rising to new
records, pulling up the price of anything that can be poured into a
gasoline tank. "The price of grain is now directly tied to the price of
oil," says Lester Brown, president of Earth Policy Institute, a Washington
research group. "We used to have a grain economy and a fuel economy. But
now they're beginning to fuse."

Not everyone thinks it's fantastic. People who use corn to feed cattle,
hogs and chickens are being squeezed by high corn prices. On Monday, Tyson
Foods reported its first loss in six quarters and said that its corn and
soybean costs would increase by $600 million this year. Those who are
able, such as egg producers, are passing those high corn costs along to
consumers. The wholesale price of eggs in the first quarter soared 40
percent from a year earlier, according to the Agriculture Department.
Meanwhile, retail prices of countless food items, from cereal to sodas to
salad dressing, are being nudged upward by more expensive ingredients such
as corn syrup and cornstarch.

Rising food prices have given Congress and the White House a sudden case
of legislative indigestion. In 2005, the Republican-led Congress and
President Bush backed a bill that required widespread ethanol use in motor
fuels. Just four months ago, the Democratic-led Congress passed and Bush
signed energy legislation that boosted the mandate for minimum corn-based
ethanol use to 15 billion gallons, about 10 percent of motor fuel, by
2015. It was one of the most popular parts of the bill, appealing to
farm-state lawmakers and to those worried about energy security and eager
to substitute a home-grown energy source for a portion of U.S. petroleum
imports. To help things along, motor-fuel blenders receive a 51 cent
subsidy for every gallon of corn-based ethanol used through the end of
2010; this year, production could reach 8 billion gallons.

Now, however, the legislation is being criticized for making food more
expensive while gasoline prices continue to climb. Rick Perry, a
Republican who succeeded Bush as Texas governor, has asked the
Environmental Protection Agency to waive half of the "misguided" ethanol
requirements because of rising food costs; every penny increase in
per-bushel corn prices costs his state's livestock industry $6 million a
year, he said.

Although ethanol was once promoted as a way to slow climate change, a
study published in Science magazine Feb. 29 concluded that greenhouse-gas
emissions from corn and even cellulosic ethanol "exceed or match those
from fossil fuels and therefore produce no greenhouse benefits." By
encouraging an expansion of acreage, the study added, the use of U.S.
cropland for ethanol could make climate conditions dramatically worse. And
the runoff from increased use of fertilizers on expanded acreage would
compound damage to waterways all the way to the Gulf of Mexico.

Development specialists have also joined the fray. "While many are
worrying about filling their gas tanks, many others around the world are
struggling to fill their stomachs, and it is getting more and more
difficult every day," World Bank President Robert B. Zoellick said in a
recent speech.
No place demonstrates the competing demands on corn better than Iowa, one
of the two biggest corn-exporting states. Iowa is home to 28 ethanol
plants, which consume more than a quarter of its corn crop; two dozen
others are under construction or in planning stages.

Two leading oil pipeline companies are exploring the feasibility of
building a $3 billion ethanol pipeline, the first of its kind, to link
Iowa and other parts of the Midwest with motor-fuel markets in the East.
It would carry 3.65 billion gallons a year and give another industry a
vested interest in maintaining high ethanol output. Because of this
domestic demand, Iowa's exports of corn are expected to shrink to less
than half of current levels in the next couple of years. Nationwide, corn
stockpiles are dwindling.

All that could make this cycle of corn prices different from previous
ones, when prices eventually fell back. "As long as you keep that ethanol
industry running, grain prices will be high," says Bruce Babcock,
professor of economics and the director of the Center for Agricultural and
Rural Development at Iowa State University. "If you didn't have this large
growth in ethanol corn, prices would be nowhere near where they are

Corn as Fuel

As consumer prices climb, more and more people are pointing fingers at
ethanol plants, like the one VeraSun Energy built here just outside
Charles City. VeraSun is riding the crest of the ethanol boom. Thanks to
internal expansion and the purchase of a rival, VeraSun will become the
nation's biggest producer of ethanol by the end of the year, with about
four times as much capacity as it had in 2005.

The plant is hard to miss. Its two massive concrete silos reach 150 feet
into the air; each one holds half a million bushels of corn, delivered by
an average of 110 brimming trucks every day. The silos are connected to a
distillery with giant shiny steel vats for milling the corn, then
fermenting and distilling it into 200-proof, fuel-grade ethanol. The
ethanol is shipped out by train, 84 black tanker cars at a time.

The VeraSun facility is buying up almost all the corn produced in Floyd
County and much of the corn produced in the four surrounding counties.
While that might seem anathema to East Coast grocery shoppers, around here
it makes VeraSun pretty popular.

"From Washington where Lester Brown is sitting, agriculture can't do
enough to satisfy the nation's energy needs and meet all the demands put
on it for food and feed," says Matt Liebman, an agronomist at Iowa State
University. "But from agriculture's point of view, [ethanol] enhances
market opportunities. So it really depends on your perspective."

Some folks around here get defensive when talking about corn prices.
Johnson, the corn farmer, points out that the share of household income
that goes to buying food has dropped steadily over the past 50 years; U.S.
government statistics say that the portion is half of what it was in the
1950s. And of that portion, farmers get about a fifth; the rest goes to
middlemen, food manufacturers, transportation, packaging and advertising.
Indeed, farm groups say that energy costs in transportation and packaging
have boosted food prices more than the price of corn has.

"There's no doubt that food prices are going to increase, but I suggest to
you that food is still reasonable," Johnson says.

Don Endres, the chief executive of VeraSun and owner of 20 percent of its
shares, grew up on a farm in Watertown, S.D., where his father and
grandfather raised corn. His brothers are still farmers.

Endres says ethanol plants aren't to blame for high corn or food prices.
He notes that the corn used to make ethanol isn't the kind that people eat
anyway. Moreover, he says, ethanol plants like VeraSun's extract the
starch in corn for fermentation while producing a dry feed that contains
protein and nutrients. Piles of it are collected from industrial dryers at
the plant. VeraSun then sells that feed, known as dried distillers grain,
back to farmers who raise animals. Much of it goes to Texas, Mexico and
China; it accounts for about 15 percent of VeraSun's revenue. When the
grain is mixed with inexpensive starch, such as alfalfa, farmers can save
money, Endres says.

Finally, he says, yields on corn will continue to increase so that the
current acreage will be able to meet both food and fuel demands. His
grandfather got 40 bushels to an acre, his father got 80, and his brothers
get 160. Someday, Endres says, farms will get 300 bushels an acre.
"I think we'll see this thing come back into balance," he says. "There's
an ability to produce so much more at these price levels."

About 20 minutes' drive from Johnson's farm and the VeraSun plant, two
neighbors, Bill Huebsch and Ray Avila, are raising about 15 percent of the
nation's capons, castrated roosters that are popular fare on Easter,
Thanksgiving and Christmas. In a shed longer than a football field, 13,000
of the birds scurry about, nibbling at a corn mixture fed through
automated pipes. In a matter of weeks, each tiny bird will eat about 40
pounds of feed.

The cost of that feed, three-quarters of which is corn, has risen sharply,
and as a result, Huebsch and Avila are asking to be paid more for their
capons -- a premium of 10 cents a pound last year and maybe another 15 or
20 cents this year -- to cover the added cost.

"Ultimately, you know where that price has to go," Huebsch says.
"Ultimately, it's the consumer that's got to take the brunt of it."

He doesn't buy Endres's argument. He says that capons, like egg-producing
chickens, can digest only limited quantities of the dried distillers
grain. And the price of that protein-rich feed is also rising. (Cattle,
which have four-chambered stomachs, can digest the distillers' grain more
easily.) Some studies have also linked dried distillers grains with the
bacterium E. coli in feedlot cattle.

"I think the ethanol is hurting us," Huebsch says. "It hasn't lowered our
fuel prices at all, and it has increased feed costs."

The sharp rise in corn prices has confounded Avila's buying plans.
Ordinarily in the fall, he buys all the corn he needs for the next season.
But with prices around $4 a bushel last fall, he decided to wait. Now
they're even higher, and he's buying only four days' supply, hoping that
the price will go down.

"I'm just going day to day," Avila says. He says that a corn farmer friend
of his bought a boat, and Avila asked whether he would name it Four Dollar
Corn. Now, Avila jokes wryly, his friend would have to name it Six Dollar

Capons are a niche product, but high corn-feed prices are also giving
poultry and egg producers a lot to cluck about. Iowa produces more eggs,
13.5 billion, than any other state. And chickens, like capons, mostly eat
corn feed. The Charles City ethanol plant alone consumes three-quarters as
much corn as the entire Iowa egg industry.

"Corn has gone up dramatically since the ethanol plants went in," says Deb
Wolf, a small egg producer in Osage. "They're buying millions of bushels.
That's got to come from somewhere." She and her husband, Keith, have a
sign reading "Eggs 4 Sale" outside their home on Route 9, and customers
often get the eggs while they're still warm. The Wolfs have tripled the
price they charge for a dozen.

"We don't have to make fuel out of corn and soybeans, but we do have to
feed animals," says Kevin Vinchattle, executive director of the Iowa Egg
Council. "We're going to be right there bidding for feedstocks and making
sure that we have the highest-quality feed available. We just don't have
an alternative."
Back in Charles City, farmer Johnson is reaping the benefits of high corn
prices. He knows what the other extreme is like. His grandparents arrived
from Germany in 1913 and, dirt poor, worked as farmhands before buying
this land. Johnson took it over in the early 1970s, when prices, which
hadn't changed much since the end of World War II, doubled and then
leveled off again for most of the next three decades.

Two hundred years ago, he says, this was prairie covered with
six-foot-high switchgrass. Winnebago Indians lived here, and then white
settlers came in the mid-1800s.

But now the ethanol plant and 50 wind turbines that were erected over the
winter have brought new energy to a town that Johnson says long lived off
"the ground God created with glaciers and laid down here."

VeraSun built its plant in this area to be close to corn farms; Johnson
says that he keeps part of the money that once went to trucking his corn
to the barge company. "That money stays in my pocket now, and I like

Johnson is a one-person summary of how high corn prices are washing
through the world of agriculture and climate change. Normally, he plants
half of his 900 acres with corn and half with soybeans. He alternates
crops on each field because it is better for the soil.

But last year he planted 500 acres of corn and 400 of soybeans, and this
year he will do the same. "The market was screaming, 'Farmer Johnson,
plant more corn, plant more corn,' " Johnson says.

Farmers across the country joined him. In 2007, U.S. acreage devoted to
corn hit a record 93.6 million acres, up 20 percent from the year before.
Farmers are expected to plant a little less than that this year.

That market response would ordinarily bring nothing but cheers, but the
growing alarm about climate change casts it in a different light. In the
United States last year, corn edged out some soybeans, which as a result
are being grown in greater numbers on previously unplowed areas in other
countries. And that releases carbon dioxide that had previously been
stored in the soil as organic matter.

Johnson, along with about two dozen other people in the area, has invested
in 25,000 acres of cattle-ranching and savanna land in Roraima state in
northern Brazil, where they have planted 750 acres of soybeans and plan to
expand. He says U.S. agriculture is a mature market. "We're maxed out," he

Meanwhile in Iowa, he is tilling his own soil more often, a farming trend
that dismays climate experts. Usually Johnson doesn't till his soil in the
fall; he points to short remnants of cornstalks that still stand in rows
where soybeans will be inserted. But Johnson plans to till a piece of land
where he will plant corn for a second year in a row.

Johnson also owns a small piece of land that is part of the federal
government's conservation reserve program, which pays farmers for leaving
land vacant. Millions of acres are in the program. The CRP parcels tend to
have lower-quality soil, and they attract birds and other wildlife. In the
climate-conscious era, they have the added virtue of storing carbon in the

Johnson put a 10-acre parcel aside years ago and signed a 10-year contract
with the government to leave it undisturbed. But the contract is running
out, and he's thinking about planting corn. The CRP contract pays him $170
an acre. Johnson says, "I'm making a lot more than that now."


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