Drought Drives up Price of Ethanol
Milwaukee Journal Sentinel -- July 21, 2012 -- The severe drought that has scorched much of the U.S. corn crop could be felt by consumers at the gasoline pump as well as the grocery store.That's because 10% of nearly every gallon of gasoline is ethanol, a fuel additive distilled from corn.
As corn fields wither in the heat, the price of ethanol on the Chicago Board of Trade has risen nearly 25% this year to more than $2.70 per gallon -- well above its average of about $2 a gallon over the last seven years.
Rising ethanol costs could add about another nickel per gallon to the retail gasoline price, said Thomas Elam, an agricultural economist from Carmel, Ind.
"With corn prices going up, the ethanol producers have to get more for their product," Elam said. "They have to recover their costs, just like everybody else."
By law, gasoline in most states must contain 10% ethanol. Supporters say it reduces dependence on foreign oil, reduces air pollution and helps support the farm economy.
Wisconsin ranks seventh among ethanol-producing states, where the fuel additive is an important source of income for grain farmers, some of whom also own shares in ethanol distilleries.
But with the drought pushing up grain prices, some corn users -- especially livestock farmers -- say the nation's Renewable Fuels Standard that mandates ethanol use in gasoline should be reconsidered.
Under the policy, billions of gallons of the fuel additive must be produced a year regardless of the effect it has on others -- sometimes pitting livestock farmers against grain farmers, with the animal producers saying it has driven up feed prices.
"There's a constant back-and-forth going on now between ethanol producers and livestock farmers," said Erin Roth, executive director of the Wisconsin Petroleum Council.
"In a good year, it's not an issue because there's enough corn to go around," Roth said. "But this fight always surfaces when U.S. corn production gets whittled away by something. And now it's being more than whittled away; it's being chopped away because of the drought."
There should be more flexibility in the number of ethanol gallons produced a year, especially when there's been a drought that's damaged the corn crop, added David Warner, a spokesman for the National Pork Producers Council.
Elam says the Renewable Fuels Standard has increased corn, soybean and wheat prices to the detriment of food and fuel producers. He says it's resulted in higher prices at the grocery store as nearly every product on the shelves is touched by the price of grain.
"The increases we have seen in commodity prices are strongly associated with the fuel mandate," he said. "At the same time, we haven't seen the promised benefits on oil imports or gasoline prices. This means that while Americans are forced to pay more for food, they're also not seeing lower prices at the pump. It's a lose-lose situation."
Ethanol policy supporters say the fuel additive is saving U.S. motorists money, partly because it typically costs less per gallon than gasoline.
But the problem with that claim, Elam says, is ethanol isn't as energy-efficient as gasoline.
"It has to sell at a significant discount to gasoline to achieve equal fuel costs per mile," he said.
The nation's corn growers say the Renewable Fuels Standard should be left alone, rather than taking a knee-jerk approach to changing it with every year's harvest.
"Having a long-term approach to an energy policy continues to be important," said Josh Morby, executive director of the Wisconsin Bio Industry Alliance. "I think we need to stay the course, with a focus on cleaner-burning fuels and renewable energy. I am not trying to minimize the impact the drought is going to have on farmers or ethanol producers, but the fact remains we have worked with politicians to develop a long-term energy policy that includes ethanol as a key component."
The price of gasoline at the pump is more affected by the cost of crude oil, the global economy, and lessened demand for motor fuel as U.S. consumers drive fewer miles and increasingly have more fuel-efficient cars.
The price of gasoline could edge up some in the next few months as higher ethanol prices work their way into the market. But that will be "small potatoes" compared with what could happen to food prices next year because of the diminished corn crop, Elam said.
In August and September, the Agriculture Department should have a better handle on how much of the nation's corn crop has been damaged. It could further fuel the debate about how much of the crop should be designated for ethanol.
Already there's a lot of pressure on ethanol distilleries that have seen demand for their product decline even as the cost of corn, their main raw ingredient, has risen sharply.
Some distilleries have shut down because of the soaring costs.
This fall, a 15% blend of ethanol in gasoline is supposed to be available in the marketplace.
But it might not come, experts say, because of the rising cost of corn.
"The 15% blend is just going to die. Just like the 85% blend, called E85, has died," Elam said.
(c)2012 the Milwaukee Journal Sentinel
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