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Will it be boom and bust for ethanol?
Hoosier Ag Today
By Gary Truitt
Cycles of boom and bust are not new to agriculture. The 1970s saw the boom of export demand that prompted then USDA Secretary Earl Butz to call for fencerow to fencerow planting. This was followed by the bust of the 1980s that saw the Russian grain market disappear overnight and interest rates skyrocket to more than 20 percent. Is the current renewable fuels boom soon to be followed by another bust?

Critics of renewable fuels and some well-seasoned, skeptical farmers think it will. The people building and investing in ethanol plants say it will not. Some thoughtful and levelheaded people admit it could - if we are not careful. One of those is Chris Hurt, noted ag economist at Purdue University. During a seminar, sponsored by Hoosier Ag Today, Hurt told a group of more than 100 farmers we can avoid the bust if we manage the boom.

Indiana is a classic example of the boom. A year ago there was one ethanol plant in the state. Today there are 21 renewable fuel production plants nearing completion. Within just a few short years, the Hoosier state will move from a corn exporting state to a corn importing state. Corn acreage, which has been declining, is now on the rise with some producers moving to continuous corn production.

Hurt has estimated that between 8 and 10 million more acres of corn will be needed nationally this next season. He said $4 corn and $7 soybeans are likely for the next two years. He also worries, however, that we are overbuilding the renewable industry and is concerned about being able to sustain this level of demand long- term.

Two major factors will determine the future of the ethanol industry, and the price of corn is not one of them. The price of oil and the level of government subsidy are what is fueling the boom and could cause the bust. With oil prices about $60 a barrel and government subsidies for ethanol at current levels, investors in ethanol plants can double their money in one year. But should either or both of these fall, the economics get real ugly.

The current level of subsidy for ethanol producers (51 cents per gallon) will remain in place until 2010. At that point, the subsidy will be kept, be cut, or be eliminated. Hurt said without a federal subsidy the ethanol industry would not be profitable if oil prices drop below $60 a barrel. He stated that the price of corn is now forever linked to the price of oil.

“For every dollar move in oil prices, corn prices will move 7 cents a bushel,” he said.

Hurt, along with fellow Purdue economist Wally Tyner, is advocating a graduated ethanol subsidy. When oil prices are low, the subsidy is high, and, when oil prices push above $65 a barrel, the subsidies go away. This, they say, will keep the industry from overbuilding and keep it tied to market forces. While I am not an economist or expert on public policy, this approach seems reasonable to me.

The renewable fuels revolution is for real. It has and will continue to fundamentally change the industry of agriculture, both here and around the world.

Yet, wise planning and sensible policies must accompany the boom or we will surely be buried in the biggest bust the world has ever seen.

12/20/2006