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The ethanol euphoria

If four or five years ago you had predicted the kind of enthusiasm we currently see for ethanol and other biofuels, we would have said, “Don’t think so.”

While we have long advocated that agriculture become a producer of food and energy, the current euphoria over ethanol production and its implications for crop agriculture in general and corn production in particular has indeed been a surprise.

Four or five years ago, before the January 1, 2004 California ban on the use of MTBE as a fuel oxygenate, we saw the development of the bioenergy industry as a way to diversify agriculture into providing biomass for co-firing utility plants as well as feedstock for ethanol production.

At that time, ethanol development was making painstakingly slow progress as the result of the hard work of some farm state legislators along with farm group leaders and some researchers who have spent decades working on the development of a biofuels industry. Progress was being made but it was one state legislature at a time with some occasional supportive federal legislation.

But, most leaders were simply reluctant to support the pie-in-the-sky idea that we could grow energy on our fields. US residents were content to drive their SUVs and shun talk of alternate fuels, conservation and higher mileage vehicles.

Then we had a couple of hurricanes that reduced oil production in the Gulf of Mexico. China and India increased their demand for oil as their industrial sectors began to boom in this age of globalization. The world’s oil producers were pumping at near capacity and oil prices quickly shot up to $60 and $70 a barrel.

Suddenly everyone was talking about ethanol, biodiesel and reducing our dependence on foreign oil. The development of new ethanol plants moved away from farmer-owned cooperatives to an increasing number of non-farm investor owned firms. Current projections suggest that ethanol might double from crop year 2006’s 5 billion gallons to 10 billion gallons in the 2010 crop year.

And some are talking about a bright future for crop agriculture where fuel demand will compete with food demand and corn prices might hit $4.00 or $5.00 a bushel.

We have to admit that such unbridled enthusiasm coming about as we are getting ready for a new farm bill makes us very uneasy. As the 1996 Farm Bill was being adopted, corn hit an all-time high season average farmgate price. In addition the expectation was that China would soon become a major corn importer. The corn was to be used as feed to produce the meat that would be demanded by a growing Chinese middle class.

As a result the policies included in the 1996 legislation assumed that crop agriculture was entering a new era in which subsidies would no longer be important and could be transitioned down to zero. The legislation contained no contingency provisions that could be triggered in case markets did not live up to expectations. In the end, we saw massive emergency payments between 1998 and 2001.

Those of us who have been around for a while have experienced a number of euphoric events. We have seen euphoria create bubbles in the market that trigger a massive shift in resource use. And while we believe that the demand for bioenergy has the potential to be more stable than crop exports, it is our experience that on the other side of euphoric bubbles is often a sudden thud.

We need to keep the possibility of a sudden thud in mind as we debate a new farm bill. Will the policy work in both boom times and bust?

Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the Director of UT’s Agricultural Policy Analysis Center (APAC). (865) 974-7407; Fax: (865) 974-7298; dray@utk.edu; http://www.agpolicy.org. Daryll Ray’s column is written with the research and assistance of Harwood D. Schaffer, Research Associate with APAC.

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