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By Robert Rapier on Feb 22, 2008 with no responses

Ethanol in the News

And the news is bad. First up, an issue that is shaping up to be a major battleground between states. Nate Hagens brought this issue up on yesterday’s API call, but it was part of the lost transcript:

Ethanol Boom Saps Water

Mike Adamson remembers when water wasn’t such a problem. As a kid growing up on his family’s cattle feedlot along the Colorado-Kansas border, “you could dig a post hole and see water runnin’ in the bottom,” he recalls. Today, Adamson is 48 and in charge of the family business, Adamson Brothers and Sons Feedlot, a holding ranch for cattle as they go to market. And the water, he says, is disappearing. “The lakes are gone. The wetlands are gone.” In fact, Adamson adds, entire stretches of the nearby Republican River are gone.

Growing corn demands lots of water, and, in eastern Colorado, this means intensive irrigation from an already stressed water table, the great Ogallala Aquifer. One sign of trouble: in just the past two decades, farmers tapping into the local aquifers have helped to shorten the North Fork of the Republican River, which starts in Yuma County, by 10 miles. The ethanol boom will only hasten the drop further, say scientist and engineers studying the aquifers.

The region’s water shortage has pitted water-hungry farmers against one another. And lurking in the cornrows: lawsuits and interstate water squabbles could shut down eastern Colorado’s estimated $500 million annual ethanol bonanza with the swing of a judge’s gavel. Collectively, “[ethanol] is clearly not sustainable,” says Jerald Schnoor, a professor of engineering at the University of Iowa and co-chairman of an October 2007 National Research Council study for Congress that was critical of ethanol. “Production will have serious impacts in water-stressed regions.” And in eastern Colorado, there’s lots of water stress.

And the money quote:

“Trying to solve problems by using the same old techniques doesn’t solve the problem,” Adamson says. “We’re going to make the area a desert. It’s going to be uninhabitable.” And that would be a high price to pay.

Check out the article. It’s a good one, and concerns an issue that is only going to grow more urgent.

Next up, last year’s crop report (published in December, but I just saw it yesterday):

CAN THE U.S. PLANT MORE CORN, MORE SOYBEANS, AND MORE WHEAT?

U.S. crop producers made dramatic shifts in acreage in 2007. The shifts were motivated by rising corn-based ethanol production and high corn prices, rising wheat prices, and a surplus of soybeans.

The acreage shift was led by a 17 million acre increase in feed grains, including 15.3 million more acres of corn. Winter wheat acreage increased by about 3.1 million and harvested acreage of hay was up by nearly one million acres. These increases were accommodated by an 11.9 million acre decline in soybean plantings, 1.3 million fewer acres of spring wheat, 4.4 million fewer acres of cotton, and about 900,000 fewer acres devoted to other oilseeds; edible beans, peas, and lentils; and sugar beets. In addition to the acreage shifts, total planted acreage (harvested acreage of oats and hay) increased by four million acres. The large increase in total acreage likely includes some pasture acreage converted to row crops and perhaps an increase in re-planted acreage stemming from the spring freeze that damaged the winter wheat crop.

The next bit connected the dots:

Prices of corn, soybeans, and wheat remain at very high levels. World and U.S. inventories of wheat and soybeans are expected to decline sharply during the current marketing year.

Another bit suggests to me that supplies will tighten further, and I should be buying corn futures:

The USDA projects the consumption of U.S. corn during the current marketing year at 12.69 billion bushels.

Why is that a problem? Because the mandate in the new energy bill is such that it will require an additional 1.5 billion bushels in 2008 and 800 million bushels on top of that in 2009 – just to meet the higher ethanol mandates. By 2012, we will have mandated an additional demand on corn supplies of 3.8 billion bushels a year as the ethanol mandate moves from 5 billion to 15 billion gallons per year. (Throw a Midwestern drought in the mix, and we will see chaos).

This is as I predicted when ethanol producers were overbuilding capacity. This wasn’t the first time I said it, but here was a comment from over a year ago:

…never underestimate the power of the corn/ethanol lobby. If producers start to lose money, the mandate will go up. The other thing I would point out is that the demand for corn will continue to increase over present values. Demand from ethanol producers will continue to grow, and this is driving high prices now. Unless farmers can bring a lot of new production online, then corn prices will remain high even if ethanol prices start to drop.

That’s exactly the way it has played out so far, so you can expect the overbuilding cycle to continue – which means continuous high pressure on corn prices. Ethanol producers are getting the message loud and clear that the government will protect them as much as possible from the inherent cyclicality (often caused by overcapacity which crashes prices). If you overbuild, the government will increase the mandates to protect you. They have set up a vicious cycle, and a very undesirable (at least for me) experiment with our food supplies.

I wonder if my neighbors will object to me growing corn in my front yard when I move back to the U.S.