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Life After Ethanol: Are we Prepared?

By Michael Bredeson

Most Midwestern farms depend on ethanol. Yet, many signs point toward a near future of fading ethanol demand. What will this mean for farm families and rural communities across the Corn Belt?

It is time to take a close look at the future of the ethanol industry. If the situation is not addressed and solutions aren’t developed, farmers could find themselves in a very dangerous crisis spurred by oversupply. Let’s start the conversation right now.

In 2020, American farmers produced a staggering amount of corn — 14.2 billion bushels. If we threw every kernel into one pile, it would tower more than 4,000 feet — a literal mountain of corn!

What is all this grain used for? A small amount becomes food for humans. Quite a lot of corn is fed to cattle, chickens and other livestock. However, the greatest portion (40%) of corn that we grow is fermented into ethanol, mixed with gasoline and burned in cars.

To help visualize the current importance of ethanol production to the American farmer, let’s imagine all corn used for this purpose (36.8 million acres) planted in one field. The size of this field would be larger than the entire state of Iowa.

The ethanol boom beginning in the mid-2000s stimulated a rural economy based on burning corn in vehicles. Rapid growth of the ethanol industry was a result of the push for U.S. energy independence. At the time, war in the Middle East threatened global oil supplies.

The Renewable Fuel Standard and the Energy Independence and Security Act paved the way for ethanol production as an alternative to fossil fuels. These new rules required oil refineries to purchase an increasing amount of ethanol every year between 2008 and 2022 to mix into gasoline. Corn farmers suddenly had a guaranteed market, with predictable increases in the immediate future. As expected, corn and ethanol production increased rapidly to meet demand fixed by the U.S. government.

Until 2013, ethanol production kept pace with what was mandated. However, since 2014, ethanol demand has fallen short and oil refineries have purchased far less than what was mandated.

The mandate is set to expire in 2022, leaving the U.S. Environmental Protection Agency to set annual refinery purchases of ethanol on a year-by-year basis. As demand has already undercut production goals set by the government, it is unlikely that the EPA will require oil refineries to buy more ethanol. What is more, concerns over how corn production affects soil, air and water quality cast further doubt on an ethanol-favorable standard set by the EPA.

What is likely a greater threat to the future of ethanol is an unprecedented acceptance of electric vehicles. Many of the world’s largest car companies have electric models available, and some, such as General Motors, have vowed to eliminate gasoline-engine vehicles from their lineup by 2035, fewer than 15 years from now. By the same year, Californians will be unable to buy new cars with gas engines.

Vehicle companies are betting on a transformational shift in the automotive industry, and the U.S. government is backing this shift wholeheartedly. In the recently proposed infrastructure plan by the Biden administration, more money is slated to be spent on electric vehicle infrastructure than on road and bridge repairs. As painful as it may be to recognize for corn producers, electric vehicles are the future of commuter transportation, and the shift is happening rapidly.

As ethanol demand fades and corn supply increases, there will be a natural price correction during which the cost of a bushel of corn falls. In response, one might recommend farmers simply switch to growing something different. However, we need to remember that corn for ethanol is grown on 36.8 million acres. What commodities are poised to make up for the massive difference?

New industries such as industrial hemp will undoubtedly replace corn on some acreage, but new commodities are slow to develop and normally supply a relatively small, niche market. A crop replacement will need to be used so widely that it rivals the historic everyday use for ethanol (10% of gasoline use in nearly every car across America).

Perhaps other food crops such as soybeans, wheat or oats will make up the Iowa-sized land area as we shift away from corn for ethanol. This scenario is unlikely for two reasons: (1) Demand for existing commodities is already being met by farmers, and (2) substantial increases in their production would result in devaluation.

To prevent what could be a significant farm crisis from affecting our economy, plans must be drawn to counter ethanol’s future. One suggestion is to replace cropland used for ethanol production with perennial grasslands for managed grazing or wildlife habitat. For several reasons, this is an affordable, viable solution that is good for farmers.

The federal government pays a mighty cost (more than $8 billion annually) to help farmers afford crop insurance, protecting farms in case disaster strikes. In the current model, only about half of the government’s investment goes to helping farmers pay an insurance premium. The other half supports overhead costs of insurance providers. Eliminating the need to support crop insurance on 36.8 million acres frees a substantial amount of money to be reallocated directly to farmers at a competitive rental price for converting annual cropland to perennial grasslands.

 

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