Ethanol: An economic catalyst for Nebraska

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By Jim Jenkins

EthanolThe rapid growth and maturing of the American ethanol industry is one of the significant business and economic stories of the past several years, particularly in the country’s heartland. This new biofuel industry is a $20 billion industry spanning more than 20 states. Most importantly, ethanol is providing more than 5 percent of the transportation fuel requirements of the United States. While this is a relatively small percentage, it nonetheless represents the first real competitive product challenge to the oil industry in its 100-plus year history. Not surprisingly, oil companies are fighting back, spending millions of dollars attempting to undermine the nascent ethanol industry. Recently, 20 other groups, including the American Meat Institute and the Grocery Manufacturers Association, launched a campaign against the ethanol industry with the theme of “food before fuel.” The special-interest groups accuse ethanol of being one of the principal causes of higher food prices. While ethanol has certainly contributed to the increase in corn prices and therefore food prices, most objective observers concur that these increases are being driven by multitude factors unrelated to corn ethanol including: oil price increases of 900 percent since 1999, surging world corn demand in Asia and Eastern Europe and drought in major food-producing areas of the world. In addition, huge amounts of speculator money has flowed into commodities as the United States stock market has stagnated since the late 1990s.

While key farm inputs such as steel, fertilizer and fuel have doubled and tripled in cost over the past four or five years, the government’s Economic Research Service projects that from 2004 through 2008 food prices will increase 15 percent, with the 2008 period contributing 3 percent to 4 percent to that total. Furthermore, the farmer’s share of the retail food dollar has declined from 32 percent in 1970 to 19 percent in 2002. As a result, the majority of the cost increases occur in food manufacturing, processing, distribution and transportation sectors, beyond the farm gate. A research paper released in April by Texas A&M’s Agriculture and Food Policy Center found that “high corn prices have had very little impact on retail food prices.” The truth is that food price increases have lagged well behind other key commodities impacting our nation’s economy and grain ethanol is a bit player in driving food inflation.

For most of the last 50 years, the challenge for United States agriculture was too much production. When I returned to my family’s ranching operation in 1996, many in the international community were accusing the United States of undermining farmers around the world by dumping cheap, subsidized agricultural products onto the market. And my urban friends were complaining about the massive government support for the food and agriculture industries. Now farmers are less subsidized and rural economies in the U.S. and around the world are surging. After decades of stagnate prices, increased farm income is driving innovation as farmers now have the resources and the price incentives to more fully implement such things as precision guidance systems, fuel-efficient equipment, advanced genetics, and water- and energy-saving irrigation equipment. Instead of undermining food production systems around the world, the biofuel industry is bringing badly needed diversification and stability to agriculture.

In addition to the rapidly growing wind-energy industry, ethanol offers our nation a significant opportunity to begin the important diversification of our energy portfolio away from fossil fuels. This diversification of risk in our nation’s energy portfolio is creating wealth in our own country and beginning to stem, if every so slightly, the massive transfer of energy dollars to other countries, now totaling over $700 billion dollars annually. Our dependence on oil also undermines our national security interests and costs taxpayers billions of dollars as we seek to protect our overseas oil supply. As former Federal Reserve Chairman Alan Greenspan wrote in his book, “The Age of Turbulence,” “…the Iraq war is largely about oil.” Given these real threats to our economic well-being caused by our dependency on foreign oil, it is imperative that the United States develop alternatives to oil. Even oil tycoon T. Boone Pickens has noted in his TV ads that “this is one problem we cannot drill our way out of.”

The current ethanol industry provides a critical foundation for decentralization of our energy industry. As ethanol technology continues to evolve, many communities world-wide will be in a position to turn waste materials such as lawn clippings, wood chips and crop residues into energy. This technology is available now and commercial development will occur within five years. Brazil, for example, is running nearly its entire transportation fleet on ethanol produced from sugar cane. Nebraska is now a net exporter of transportation fuel, producing approximately 1.3 billion gallons of ethanol and consuming 900,000 gallons of transportation fuel. The United States through public/private partnerships is presently building six cellulosic ethanol plants that will test the capability of producing ethanol from non-corn-based plant materials, providing further diversification for our rural economies while adding to our fuel supply. Importantly, plant matter is available all over the world, whereas oil is available in a comparatively few select regions. In the end, we may in fact use most of our plant matter for food, but given the present energy challenge, is it not prudent to at least develop viable alternatives?

Change always causes some hardship. Presently the livestock industry has experienced a significant erosion in profitability as it has been forced to compete with the ethanol industry and export markets for grain. Nonetheless, there is plenty of evidence that market forces are at work providing stability to both the ethanol industry and the livestock industry. Elevated corn prices have sent a clear signal to the ethanol industry to slow expansion and, in fact, a number of plants may cease production over the next several years. In addition, the cattle-feeding industry, which consumes over 30 percent of the corn crop, is ratcheting down its utilization of corn and instead using less expense forage to place weight on cattle. Dan Loy, a beef nutritionist at Iowa State University told “Successful Farming” magazine that the amount of corn used in traditional finishing programs “can be cut in half.” The cattle industry is also beginning to more efficiently utilize distillers grains, which in effect replace more than 40 percent of the bushel of corn that went into the ethanol plant initially. As a cattle producer, I am confident that we will be stronger and more efficient in the era of $4.00 plus corn than the three decades of $2.00 corn, which contributed to overproduction and inefficient feeding practices.

Throughout our history, our free enterprise system has partnered with our democratic governmental institutions to create the most dynamic economy in the world. Each of our major industries, including transportation, food and agriculture, energy, education and our world-leading technology sector, has received major support from the taxpayer. A few examples include the transcontinental railroad, our interstate highways, the Internet, food and agriculture research by our land grant universities, and important conservation projects implemented after the Dust Bowl disaster of the 1930s. These past challenges provide wisdom and inspiration for developing a vision and plan for dealing with the present energy crisis.

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