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There are some limits to ethanolís wild success
When biofuel promoters begin to extol the virtues of ethanol, itís sometimes difficult to determine if their excitement is powered by corn-based fuel or corn-based liquor.

Please donít misunderstand. Ethanolís 25-year childhood is over; itís on a rocket ride no alternative energy source has ever experienced in America.

And, yet, caution signs - some close, others years away - are coming into focus. Farmers, farmer-investors and community leaders in pursuit of new markets, value-added profit and local jobs need to consider these signs because, ethanol, like its cousin ethyl, might deliver a head-splitting hangover.

The first is ethanol imports. President Bush, an oil patch flower, endorses waiving the 54-cents per gallon tariff on imported ethanol to ease regional tight stocks. The Congressional farm bloc, led by Iowa Republican Sen. Charles Grassley, however, hopefully bolted that back door in an over-my-dead-body letter to the President May 12.

But that swift slamming, as Grassley noted in his White House missive, does nothing to stop duty-free ethanol imports allowed under the Caribbean Basin Initiative. That law permits 7 percent of all U.S. ethanol consumption to be imported tariff-free every year. The sliding scale means an estimated 315 million gallons of non-tariff, foreign ethanol can land here this year; 476 million gallons next year.

A second concern, highlighted in the USDAís May 12 Supply and Demand Report, is a most pleasant problem: corn supplies flowing into ethanol production.

In the S&D, USDA shows corn used in ethanol production rising from 1.32 billion bu. in 2004/05 to 1.6 billion bu. this year to 2.2 billion bu. next year. That near-doubling, along with this yearís estimated 3 million-acre cut in plantings, will add 20- to 40-cents per bushel to corn prices, USDA guesses.

At some point, though, ethanol economics run into trouble. Daniel G. De La Torre Ugarte, a research associate in the University of Tennesseeís ag policy shop, calculates that threshold at about 7.5 billion gallons of annual production, or about 1 billion gallons over 2006ís anticipated 6.5 billion production.

ďThe market will continue to expand,Ē noted De La Torre Ugarte, ďbut corn cannot provide all the nationís ethanol. Beyond that, higher prices begin to become self-defeating.Ē

Coincidentally, 7.5 billion gallons is the 2012 Renewable Fuel Standard established in last yearís Energy Bill. At todayís rate of biofuel plant expansion, that mark will be hit long before 2012.

Purdue ag economists Chris Hurt and Otto Doering are beginning to get itchy about corn-based ethanol, also. It will take 2.5 billion bu. of corn to make 7.5 billion gallons of ethanol. That demand will cut into soybean and wheat production, they foresee, as well as increase feed prices for livestock producers.

Additionally, more ethanol means more ethanol byproduct, chiefly distillers dried grain, or DDG, noted Hurt. While DDG is an excellent protein substitute in cattle and sheep feed, what it substitutes for - soybean meal - will rattle the soybean processing industry.

DDGs will ďhave the largest impact on the animal feed industry of any event since the advent of soybean meal in the 1940s,Ē Hurt said.

In short, ethanol production is a greyhound, soybean processing a mutt.

Hurt and Doering also see local elevators losing ground as more local corn is used by local ethanol plants. ďSome of todayís grain elevators will probably go out of business,Ē they noted.

These changes have not escaped the notice of the Global Grain Gang. Cargill, a 120-million-gallon annual producer, wants import duties dropped. And, yes, Cargill has off-shore ethanol plants.

Archer Daniels Midland, however, opposes the tariff waiver - largely because itís adding 500 million gallons of new U.S. ethanol production. When on-line in 2008, ADM will make 1.6 billion gallons, by far the industry leader.

In fact, ADMís new boss, Patricia Woertz, - the firmís first non-Andreas since the 1960s - is the former executive vice president of oil giant Chevron. It, like Purdue, sees ethanol ascendant, soybeans descendant.

And maybe so should you. Ethanolís fast dance will continue. Plan for it or even join in. Remember, though, limit your trips to the punch bowl because itís not called punch for nothing.

This farm news was published in the May 24, 2006 issue of Farm World.