Ethanol: Inequity for Farmers

The spike in farmland prices precipitated by ethanol production and speculation will squeeze out growers of grain and vegetables other than corn. Pro or con?

Pro: Big Corn’s Coup

Since President Bush called for a fivefold increase in ethanol fuel production by 2017, a scramble to snatch up farmland and max out corn production has ensued. The Agriculture Dept. projected that U.S. farmers will plant 90.5 million acres of corn in 2007, a 15% increase over last year and the biggest crop since World War II.

The corn gold rush has caused farmland prices to surge, especially in the Midwest, where the race to buy up land is the most fierce. In Iowa, the country’s biggest ethanol producer, prices have risen about 15% since last year, and the government reports record average-per-acre values across the country. One government study showed property prices averaged $2,160 per acre at the start of 2007, up 14% from a year earlier.

Who wins when U.S. farmland prices spike? Agribusiness, of course. Large industrial farms already benefiting from massive government subsidies for corn and soy crops routinely win out against small farmers. Allowing the big guys to bully the independents doesn’t fit well with the pastoral ideal of preserving the American farm.

This David-and-Goliath phenomenon hinders not only fair competition but also crop diversity. Excessive proportions of U.S. land are devoted to corn and soy, grown mainly with genetically modified seeds drenched in pesticides when they grow into plants. These industrial megacrops cause tremendous harm to the environment and increasingly force the U.S. to import fruits, vegetables, and other grains.

In this landscape, farmers committed to sustainable practices and crop variety have the least chance of securing room to grow. As the trend continues, it is no surprise that only the wealthiest Americans can afford the healthiest produce: organic. With the status quo of government-funded agribusiness, most Americans will fill up on cheaper, conventionally grown fruits, pesticides notwithstanding. Fresh heirloom tomatoes and plump organic peaches will remain out of reach.

Con: Trust the Invisible Hand

Ethanol represents one of the most extraordinary U.S. success stories of our lifetime. Over the past decade, U.S. farmers and entrepreneurs have taken action against expensive oil, building more than 100 ethanol production facilities nationwide. Ethanol reduces harmful tailpipe emissions, pumps new life into our economy, and lessens our need for oil and gasoline from unstable regions.

The homegrown ethanol industry has a positive impact on U.S. agriculture as well. Nearly half of U.S. ethanol plants are owned by farmers and local investors, creating new revenue for these citizens and their communities. Ethanol production has strengthened local corn prices from chronic lows, aiding farm income through the marketplace and reducing the need for government income supports.

The assertion that other crops will find themselves squeezed out of the picture because of ethanol’s demand for corn is shortsighted, overlooks the incredibly productive capabilities of U.S. farmers, and neglects to take into account the remarkable technology innovations in agriculture today.

Further, the ethanol critics’ theory that every inch of cropland will be plowed under to plant corn constitutes an insult to U.S. farmers’ generations of commonsense land stewardship. Farmers understand that not all soil types and climates are conducive to growing corn.

The marketplace signals for balance. Last year, rising corn prices indicated that the market needed to satisfy demand, including increased ethanol production. This year, a larger corn crop means corn prices have dropped and other prices have risen. Next year, some of the 15% increase in corn acreage will perhaps shift toward wheat or soybeans with these prices gaining strength. The market functions as intended, with give and take, not with pendulum swings toward one crop and away from all others.

Cellulosic ethanol, the exciting next phase in renewable fuel production, looks beyond corn to other feedstocks like grain straw, grasses, wood chips, and citrus waste. Every region of the country can play a role in smart, balanced ethanol production through locally available materials.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

John W. Evans Jr

Energy for transportation from ethanol is a scam. It is not efficient. It will cause all kinds of environmental problems.
It will cost the taxpayers a lot of money. The only beneficiaries will be large, already rich farming and financial interests (ADM). The rest of the country will pay a high price to no advantage.

concerned

How can Mr. Jennings in good faith point to the "invisible hand" as justification, when the market is grossly distorted by subsidies and protectionism in favor of his industry?

Perhaps these marketplace signals he refers to actually indicate that demand for ethanol is healthy enough that we need no longer spend taxpayer money artificially supporting it.

random

Ethanol is the fuel we love to praise and hate to critique. Every time someone brings up the fact that the U.S. needs to wean itself off of foreign oil to fix a myriad of foreign and domestic policy problems, the Mr. Jennings' of the world rush to the Hill to heap praise onto this supposedly wondrous super fuel with the potential to make farmers wealthy, cure U.S. of its oil addiction, and end terrorism by removing a source of financing for many terrorist groups.

But the truth is that what Mr. Jennings does for a living is win subsidies for ethanol makers, and he's not going to tell you up front about the fact that ethanol won't do much to help us with our oil problem and that despite cellulosic ethanol is supposedly just around the corner, it's the corn and soy farmers who will benefit above and beyond everyone else thanks to government subsidies and the laws of chemistry.

You see, E85 is only 70% as efficient in car engines as gasoline (that contains up to 10% ethanol by volume). Just take a look at the performance stats for FlexFuel vehicles. They're not exactly what you'd call stellar. We'd need to produce more ethanol then the amount of gasoline we're trying to displace. This demands the use of fossil fuels and yes, more gasoline since the other 15% of E85 is good old-fashioned petroleum-based gasoline. So we'll be stuck making more ethanol with more gasoline on top of the gasoline we already use to grow and harvest corn and process it into E85. On top of that, E85 requires a massive nationwide delivery infrastructure to the tune of a few trillion dollars since it's more corrosive and needs special pipes to be moved around. Don't expect the oil sheiks to be quaking in their shoes anytime soon. They already did the SWOT and cost analysis on this long ago.

As for why corn farmers will benefit most of all, the answer lies in Mr. Jennings' day job. The volume of subsidies, protectionism, and mandates driving the ethanol industry ensures steady supply and an artificial hike in the price of corn. Meeting the artificial supply mandates will fall to those with existing infrastructure, i.e. the corn farmers. Even more important, the ethanol mix is just not going to benefit all that much from extra vegetable fibers on a chemical level. In other words, corn and sugar cane will always be the predominant chemical make-up of ethanol fuels. For all the chipper talk about cellulosic ethanol, it's just not as effective or powerful and still needs lots of corn or sugar cane to actually make a workable fuel.

Even if the ethanol market ever becomes an actual free market rather then the heavily subsidized government backed project it really is today due to energy bill mandates and farm subsidies, chemistry will simply block farmers who grow other fruits, vegetables, and grasses from coming into the game. If government keeps asking for more and more ethanol, these "lesser" players may easily be shoved aside for more corn farms to grow more ethanol for the sake of "meeting the nation's energy needs" even if the whole process results is a net energy loss as described above.

Richard Borland

Corn used in ethanol production is "field corn" and hence only suitable for animal feed or ethanol production. Its diversion to ethanol might squeeze the profit margins of meat producers, but it doesn't affect human vegetable consumption. We can only eat sweet corn, and zero of that is used for ethanol.

LEWIE THE THIRD

The problem is that those farmers use the other fields that previously were set aside for other things--like vegetables and fruits or hay--for corn. I like the Amish way of living, no waste, no pollution, no stress, and after all, no filthy politics. Viva Ron Paul, next president of the U.S.

Joe Lovshe

You should really do some homework on the high cost of corn ethanol. Our congressional types think it's great, but when you scratch deeper, you find out that ethanol and bio-diesel are like a hidden tax. Just take a moment to call a local pizza restaurant or hot dog stand and ask the question: "Hey have you seen any rise in prices?" and you will get an earful. Try talking to any food manufacturer or grocer and you'll find that the price of everything is spiraling out of control. Then if you are still interested, go to youtube and search "ethanol," and the first thing you will get is John Stossel's report on ethanol, and you will find out some surprising things. Ethanol is a zero gain of energy (probably less), yet we pay a secret tax to participate in this mess. The farmer has always been held up as the American hero, but who is going to bail out the restaurant, the grocers, and every other victim of this scam? If you really want to find out something, look at the world consumption of European bio-diesel and ask who is the No. 1 producer: ADM. Then look at U.S. ethanol and ask who is the No. 1 producer: ADM. It won't take you long to figure it out--our politicians are in bed with, well, you guessed it: ADM.

Charlie Peters

Does fuel ethanol policy increase oil use and oil profit? Some folks think so.

Clean Air Performance Professionals

ed namer

This should be a start, not the final destination. It is definitely not efficient today, but pessimists should be more patient, too. As the ethanol industry evolves, it will bring incremental changes. Indeed, when the breakthrough comes either from algae or cellulosic, the plants will ready to deliver to the U.S. market. We would like to see the sheiks lease Vienna Headquarters as OPEC (an unjust cartel) will shut down.

Think

The previous blogs miss the two most important points. One is "net energy," and the other separate point is "net cost."

Regarding net energy, there are conflicting studies on whether ethanol is a net gain of energy or has a small net loss. The studies are often funded by industries that are vested in the the outcome, who dictate the conclusion and then back into the analysis. Ethanol is valuable to America's and the world's need for energy only if net-net it produces more than it uses. If it does and only to a small degree (which I believe), then it is a source of energy that can be used.

On the second issue of net cost, we need to know the true economic cost of production and transportation to its best market, all without any governmental subsidy. Then, the marketplace can decide its energy value in comparable BTUs and value it accordingly. However, the same is true for petroleum-based gasoline. Though it takes some energy to produce oil and gasoline, and that ratio is much better than the net-net energy ratio of ethanol, we thus know we will always produce and use gasoline. However, it also needs to be priced at its true economic cost. One of the major costs associated with gasoline production is not currently borne by the producer, but alternatively by the public at large. That's the military cost of protecting the world's supply of oil.The U.S. has to protect its allies like Kuwait, UAE, Saudi Arabia, and Canada. The U.S. is in military conflict with other oil nations like Iraq, Iran ,Venezuela, etc. Why do the latter countries dislike many American policies? Why are we involved with their internal politics? Why do we send military there, but not elsewhere in which genocide occurs regularly? It's oil. I do not blame the Clinton Administration or the Bush Administration or the preceding administrations. But if you were the U.S. Commerce Secretary or President and you were briefed as to what happens to the U.S. way of life with a huge drop in access to oil/gasoline (makes Katrina look small), then you have a duty to keep the oil flowing.

The point is, the economic cost of a gallon of gas may be $7 to $8 a gallon. Yes, gasoline production creates more energy than ethanol production, but it costs a lot to produce gasoline.

Finally, if oil and gas were to bear the true economic cost of its production, that would increase the economic cost of ethanol because it uses a lot of the same in its production.

Dr. Serendipitous

We are probably within five years of a major breakthrough in electricity storage technology for automobiles that will make the performance of electric cars on par with the internal combustion engine cars. With such a prospect, there is no point in pushing ethanol as the replacement fuel for gasoline. The future of automobiles lies with electricity, not with hydrocarbon fuels.
Thus, the conversion to E85, as some ethanol proponents are hoping, is wholly unnecessary and unwise since the enormous sum of money required for new infrastructure for the ethanol conversion will be wasted on obsolete technology once electric cars start to make a heavy inroad within the next 10 to 15 years. It is also highly questionable as to whether American agriculture is capable of producing enough ethanol to achieve E85 conversion in the next 10 to 15 years.

Consequently, the most this country should do is to ensure that all gasoline sold in the U.S. is an ethanol blend with 10% to 15% ethanol content that is domestically produced, on which the existing cars will run without any engine modifications. Anything beyond that will be a waste of money.

John Foust

I am glad to see the oil lobby controls this Web site along with the tree huggers.

Ethanol is here in Iowa, and farmers are cashing in on a product that will have a two- or three-year life span, since right now Cargill is building a large ethanol plant offshore to process watered down ethanol being shipped to it from Brazil so it can avoid import taxes. Existing ethanol plants are hardly breaking even here in Iowa, and without the government subsidy would be shut down. A large number of projects have been placed on hold; unless Congress increases the percentage of ethanol to be used in gasoline and oil remains at more than $75 a barrel, these projects are nothing more than a flash in the pan. I am for ethanol, but it appears its future is limited, and its life is connected directly to the winds blowing in Washington. Believe me, Cargill, Archer Daniels, and Bunge have a great deal more power than farmers here in the Midwest and outside investors jumping in to drive land prices up to $7,000 an acre based on ethanol.

If you live long enough, as I have, you will realize that when life insurance companies start investing in farmland, it is time to put your money somewhere else, because these entities have been notorious for losing money on agricultural land investments. So there will be a lot of people burned from the fallout that is coming. Cash rents of $300 an acre to raise corn is not sustainable; it will break farmers. And New York bankers using a capitalization rate of 5% justifying their purchase of land at $6,000 an acre are going to get burned. I purchased most of my farms in Iowa for $400 an acre, and to a farmer like me, that is enough. Besides, land is a worthless asset to a farmer since real farmers will never sell their land. Speculators got burned during the farm depression of the 1980s, a period when I lost more than 2,000 acres I had spent 15 years assembling. Fortunately, I was young enough to recover and replace land lost at much cheaper prices. Ethanol is a flash in the pan, so do not fret. The federal government will never let a farmer make any money. That is why it has turned into a welfare profession for grain farmers in Iowa. Without the government welfare check, each Iowa corn farmer would be broke. Have a great day.

random

"I am glad to see the oil lobby controls this Web site along with the tree huggers."

So Mr. Foust, because it lets both environmentalists and people who have doubts about ethanol's efficacy as a fuel share their views, it means that the site is "controlled" by the oil lobby and a pejorative for environmental activists? It's interesting to see that a medium that simply publishes the words of an individual for people to read and consider is immediately slammed as being controlled by nefarious interests as soon as it publishes something you don't like to read. Differing opinions are everywhere, and if you can't stand them, I would suggest considering why this is the case.

Ethanol is simply not viable as a fuel (see my previous post as to why), and putting it into gasoline to further dilute our gas mileage and make us fill up more often at prices north of $3 per gallon is not exactly a gleaming business case. Ethanol is a flash in the pan, because it just isn't up to par, not because of speculation by insurance companies as you seem to suggest.

FatSean

Ethanol from crops is a joke. Depleting farmland to grow fuel? Insanity. As others have noted, ethanol is only profitable with government subsidies.

No, ethanol from crops is a money grab by lobbyists and farmers. It is totally wrong for the future. Perhaps if these companies figure out how to grow it in a vat, ethanol can be useful, but now it costs more than oil and packs less punch. It's just a stupid idea, but it has governmental and corporate backing, and they spam us constantly with pro-crop-based ethanol propaganda.

MikeMN

The unintended consequence of using a feed grain for ethanol production is a hidden and highly regressive tax on our poor. The increase in food prices caused by using feed grains is deplorable. It is even more unconscionable when one learns that there is an import quota on sugar (feed stock for ethanol production in Brazil) and a high import tax on ethanol (Brazil produces excess ethanol and exports to other countries).

The U.S. Farm Bill should allow U.S. companies to buy both sugar and ethanol at the world price.

Additionally, where will we come up with the water needs for expanded ethanol production?

Jimmy Crackcorn

When, oh when, oh when, will the public realize the deadening hand of government hopelessly distorts the intricate messages of free markets. Our proud farmers--"heart of America"--are on an ever-expanding welfare program. Just check the massive annual farm bills that never, ever shrink, much less go away. Every aspect of farming is based on wildly misguided judgments and inane capital commitments due to the entire system floating on an ocean of taxpayer waste matter, i.e., billions of our hard earned incomes squandered in the Farm Belt to maximize vote-buying. Put a close eye on Chuck Grassley, if you can stand it for longer than a blink. With "leadership" like this, no wonder the U.S. is rapidly receding to a Second World nation. Isn't it blindingly obvious that the state-mandated farm sector, as with every government poisoned "market"--health care, schools, education, post office, airports, gasoline formula mandates, you name it--everywhere the power grabbers stick their noses (and our billions) and run off private enterprise, the end result is a Soviet style pecuniary black hole and a perpetual circulation of ever-more-asinine "unintended" results. Every alternative, renewable energy source is a massive misallocation of precious capital. None of them stand the practical test of the market without billions of our dollars wasted for rotten political gain. Why do you think Al Gore is joining Kleiner Perkins? To suck hundreds of billions of our tax dollars through their bank accounts and down the sewer of economic idiocy--subsidized pipe dream "alt energy" boondoggles. "What fools these mortals be!" Where and when will this American downward spiral finally hit the wall?

Faust100F

I loved reading "random" comments regarding tree hugging and voicing his concerns about the inefficiencies of ethanol as justification for terminating an effort to become energy independent. Right now, we are not a free nation, we are owned by China and OPEC and the only way we can recover from that situation is to drive down the dollar and pay back U.S. debt with worthless currency. I know that you all still believe that we farmers in Iowa are illiterate stewards of the land, that is a wonderful illusion for those of you who love the picture "American Gothic". The truth is I hold a law degree and a CPA certificate, tools I needed to operate my farming operations, we are much better educated here in Iowa than those of you who rely upon others to provide you a paycheck, and who think success in this world is having a good 'job', life is more than a Job or being a wage slave to the jews in New York. Life should be an adventure, not a path constantly seeking security without risk. My father always told me, if you cannot accomplish your objective in life, or find your passion, you can always become a government employee, a judge or a tenured college professor and sit in the bleachers and be an observer and never actively participate in the adventure of living a life not dependent upon others. So you tree huggers have a great day, and sit around and find reasons why things will not work, and worry about mundane things like fuel effeciency and growing heritage tomatoes, it is much easier to be critical of others than get in the game of life. Tonite when you eat a meal in Mannhatten or on the left coast,you will find out how hard it is to cuss the american farmer with your mouth full. Have a great day. John Foust

Micky

Any of you considered its impact on high food-import nations and Asian developing nations? Please don't kill the developing nations.

jonny Boy Evans

God bless the American Farmer. I love to eat.

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